Retirement planning usually includes one or more questions about how Social Security is calculated. Social Security Administration (SSA) has established age 66 as full retirement age (FRA) for purposes of calculating your monthly retirement benefits.
The benefit amount you draw will depend on how much money you earned in the span of your working life and how many earnings credits are in your Social Security account. Review your Social Security My Account any time at https://www.ssa.gov/myaccount/.
Maximum Social Security Retirement Benefits
The maximum Social Security retirement benefit won’t support truly carefree golden retirement years for most. SSA allows each future beneficiary to four earnings credits per year. Social Security tax paid per worker, employer, or self-employed individual is a fixed rate.
Although the amount necessary to earn a credit may increase in any year when average incomes rise in the U.S., high wage earners shouldn’t expect to live large on future Social Security benefits. The maximum Social Security retirement benefit for a beneficiary retiring at FRA was just USD 2,663 per month in 2015. In 2016, the maximum declined to USD 2,639 per month.
Taking retirement benefits before FRA will decrease your monthly retirement benefit. The maximum retirement benefit at age 62 is USD 2,102 this year. Waiting until your 70th birthday could increase your maximum monthly benefit to USD 3,576.
Unfortunately, the average American earns a monthly Social Security retirement benefit of just USD 1,341.
Calculating Social Security Retirement Benefits
SSA uses a proprietary algorithm to calculate the retirement benefits:
The calculation adjusts the income you’ve earned over the years, up to certain yearly limits, into present value dollars.
The amount determined is called your SSA indexed earnings.
After SSA arrives at your annual indexed earnings, your highest 35 years of earnings are added. The sum is then divided by 420, or the months in 35 years (12 x 35).
• The amount is your SSAaverage monthly indexed earnings.
After Social Security calculates your average monthly indexed earnings, the figure is reduced into smaller parts. SSA then uses a proprietary multiplier to arrive at your monthly retirement benefit.
Let’s review how Social Security is calculated for an individual born in/after 1954:
The first USD 856 of indexed monthly earnings is multiplied by 0.90.
Any amount between USD 856 – 5,157 is multiplied by 0.32.
Any amount higher than USD 5,157 is multiplied by 0.15.
The resulting figures are then added and rounded down (to the closest dollar). The final figure is the individual’s estimated SSA retirement benefit at FRA.
Social Security Retirement Benefit Calculator
Understanding how Social Security retirement benefits are calculated and why they’re calculated this way can seem challenging. That’s why Social Security Administration offers beneficiaries a variety of useful calculator tools on their website. Visit https://www.ssa.gov/planners/benefitcalculators.html to estimate retirement benefits, the time value of benefits, life expectancy, retirement age, spousal benefits, and more.
If you’ve already signed up for your Social Security My Account, you can login to review specific retirement details there.
Social Security Retirement Data
SSA says the average Social Security retirement benefit is about USD 16,092 this year. Because so many variables go into how your Social Security retirement benefit is calculated, don’t assume you’ll earn the average. SSA data shows that most retirees earn USD 700 to USD 1,800 per month (2015). Contact Social Security at 1-800-772-1213or visit a local SSA field office to learn more about calculating your Social Security retirement benefits.
If you’re interested in increasing your monthly Social Security check, consider these options before claiming your benefits:
If you’re at or near FRA and in good health, working a few extra high income years can offset lower income years earlier in life. That’s important when SSA selects your 35 best earnings years.
Save as much of your earnings as possible in these extra earnings years.
If you’re at FRA and in good health, working until your 70th birthday can help you get the most from your SSA retirement benefits. If you were born in 1960 or thereafter, your FRA is age 67.
Your monthly retirement benefit at age 70 in that case is 124 percent of your FRA benefit at 67!