Calculating your exact Social Security payout is next to impossible, but you can determine a close estimate of your future benefits. How much you will receive depends on several different factors. The Social Security Administration (SSA) will take into account how many years you have worked, how much you earned over your lifetime, what you made in your highest income years, what age you start receiving benefits, and inflation.
Average Indexed Monthly Earnings (AIME)
To estimate how much you will receive, you first need to determine your AIME. This is the part of the equation that accounts for the number of years you worked and your yearly income. However, not all of your working years count. The SSA only takes into consideration your 35 highest income years.
You may not have been keeping track of your yearly earnings, but the SSA has. On your Social Security statement, you should see a list of your yearly incomes, as reported to your Social Security number (SSN). Before you try to determine your top 35 years, you need to adjust each year’s earnings accounting for inflation.
To do this adjustment, you will need to visit the Social Security website and refer to their list of the yearly national average wages and wage indexes. Your yearly earnings will be adjusted for inflation to equate to the national average wage of the year you turn 60. This is referred to as your indexing year. To do this calculation:
- Divide the national average wage of your indexing year by the average wage of the year you are trying to adjust.
- Take that number and multiply it by your actual earnings for that year.
- The answer is you get is your income for that year, adjusted for inflation.
If you have not yet reached 60, you will have to estimate the national average wage, so your calculations will be less accurate. After each of your yearly earnings has been adjusted, figure out the 35 highest incomes, add them together, and divide by 420 to get your AIME. If you do not have 35 years worth of incomes, use a zero for any missing years.
Primary Insurance Amount (PIA)
Social Security was developed to provide more assistance to low-income individuals than those with higher earnings, so your benefits are calculated using what the SSA refers to as bend points, which are also adjusted yearly according to inflation. The bend points from whatever year you turn 62 are used to determine your benefits. Bend points from each year are available on the SSA’s website.
Using the bend points for 2018, you will receive:
- 90% of the first $895 of your AIME
- 32% of anything over $895 and up to $5,397
- 15% of earnings over $5,397
The total of these three calculations equals your PIA, which is the monthly amount you will get if you wait until your full retirement age (FRA) to begin drawing Social Security.
As previously stated, if you want to receive your full PIA, you will need to wait until you reach your full retirement age, usually 66, to start using your benefits. If you plan to retire at a different age, you will need to make some adjustments to get a more accurate estimate.
You will see a reduction in your benefits if you choose to start drawing early. If you are 36 months or less away from your FRA, your benefits will be reduced by 5/9 of 1% monthly. For those over 36 months away, this reduction still applies, but any months over 36 are reduced by 5/12 of 1%. According to this formula, if you start receiving benefits at the minimum age of 62, you will get 25% less than if you wait until your FRA.
If you hold off on receiving benefits past your FRA, your benefits will be increased by 2/3 of 1% for every additional month. This comes out to an additional 8% each year, up to age 70, for a total of an additional 32% if you wait to use your benefits.
Inflation has an impact on your PIA as well. If you wait to begin receiving your benefits, your PIA will likely increase due to the yearly cost of living adjustments (COLA). However, even if you start using your benefits at 62, your monthly payout will still be increased periodically by the SSA’s determined COLA to compensate for inflation.
You can find more information on the Social Security Office Website: https://www.ssa.gov/oact/COLA/Benefits.html