Your Social Security Advisor

How is my Benefit Amount Calculated? – Ask Rusty

social security benefitDear Rusty:  A friend and I, both approaching 62 years old, were discussing Social Security the other day, and he said that they take the average of your highest 10 years of earnings to figure out what your benefit is.  I told him I thought the formula is a lot more complicated than that, but he insisted he was right saying his cousin has a friend who works for Social Security.   Is my friend correct?  Signed:  Skeptical

Dear Skeptical:  You are right to not take your friend’s opinion as correct, even when he claims to have a source who works for Social Security.   Social Security rules are quite complicated, and are easily misinterpreted, even by some folks working for the Social Security Administration.  Most of the time, the mistaken opinion about the 10 year factor is due to a misunderstanding of what that factor actually is used for by Social Security, which is to determine your eligibility to collect benefits in the first place.   A worker must have earned wages for a total of 40 quarters, or at least 10 years, in order to receive Social Security benefits on their own work record.  There are other ways to be entitled to Social Security benefits (e.g., spousal, survivor and disability benefits), but to claim on your own work record you must have earned at least 40 quarter credits (10 years times 4 quarters per year = 40 quarter credits).  And the good news is that you only have to earn a certain dollar amount to get credit for a quarter; you don’t have to work the entire calendar quarter.

So how does Social Security actually figure your benefit amount?  To determine that amount they first use the 35 highest earning years in your lifetime work record, but only earnings up to the amount you paid Social Security taxes on[1].    They then adjust (index) each of those year’s earnings for inflation, add them up and divide the total by 420 (the number of months in 35 years) to arrive at something called your Average Indexed Monthly Earnings (AIME).  Note here that if you didn’t have at least 35 years of earnings, they will put zero’s in for the years you didn’t earn, which means that your AIME will be smaller if you didn’t work at least 35 years.  Now your AIME isn’t the amount of your benefit either but it is used to calculate what Social Security calls your “Primary Insurance Amount” or “PIA” – the amount of benefit you will be entitled to at your “Full Retirement Age” or “FRA” (as you can tell, Social Security loves acronyms!).  In true government fashion, the calculation of your PIA uses a formula which includes something called “bend points”, which are several points at which a different percentage of your AIME is used to figure the amount of benefit you would get if you took benefits at your full Social Security retirement age (age 66 for most people retiring today, but more if you were born after 1954).  And that’s where it stops – if you start taking you benefit at your full retirement age.  But if you retire earlier your benefit will be reduced.  And if you retire later your benefit will be increased.  How much of a reduction or increase?  That’s a topic for another time.

The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the AMAC Foundation’s Social Security Advisory staff, trained and accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). NSSA, the AMAC Foundation, and the Foundation’s Social Security Advisors are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government. Furthermore, the AMAC Foundation and its staff do not provide legal or accounting services.

[1] If you earned more than Social Security’s maximum taxable amount in any given year, your earnings for Social Security’s purposes for that year will be the maximum taxable amount – the maximum amount on which Social Security taxes were withheld.

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Russell
4 years ago

I think there is an important error in your explanation. I think that each of all of your yearly earnings are adjusted for inflation and then the top 35 are used to calculate your PIA.

Gary Ross
4 years ago

Every time I get my check stub, there are two deductions taken out that I have no say-so over. One is SS and the other Medicare. Now, if that money is taken from the working people, and trusted to the government to manage, then can someone please explain the following?
1. Why are they in financial trouble? The government has the best and brightest professionals money can buy. Shouldn’t they have seen the baby boomer issue coming a long time ago and invested our money to compensate?
2. How has the government any authority to take those “special taxes for special purposes” and dump them into the general fund for spending? How is it “legal” for the government to take our money and put it somewhere else in the government? I think all the money taken from both programs should be put back with interest and penalties!
3. Why are so many getting away with fraud?
4. Why are so many who have never paid into the system, benefiting from it? FYI, my own brother is a good example.

Dave M.
4 years ago

My full retirement.age is 66. My birthday is in October 2017 and then I will meet that milestone. If I was to retire at 65 and 1/2 years what would be,approximately my % reduction inS.S. verses 66 years old. Also,I have been remarried 7 years when I retire at 66.My wife now has worked the last 35 years.If I pass away before her would she be eligible for any of my benefits? Her income has been about 1/2 of mine for that period. She 13months younger then I. Thank you.

Rusty
4 years ago
Reply to  Dave M.

Please email your question directly to us at [email protected] and we will be happy to have one of our Certified Social Security Advisors address your question

Terry Akens
4 years ago

Based on a book I have been reading “Get What’s Yours ” Kotlikoff, Moelter, and Solman. Do you recommennd it? I have been reading about the 8 percent increase past FRA. Is that correct? I a 67 and plan to work hopefully another year or two. I am trying to keep away of collecting on SS. On another note, how is it taxable? by amount of income ? i

Rusty
4 years ago
Reply to  Terry Akens

Please email your question directly to us at [email protected] and we will be happy to have one of our Certified Social Security Advisors address your question

Ted L
4 years ago

I read in a comment somewhere that the benefit was 90% of first 10k of base and worked down to 10% of base over 60k. I’ve not seen this officially but it seems about right when comparing the wife and I. The article talked about b”bend points”. Has anyone seen this officially?

Rusty
4 years ago
Reply to  Ted L

Please email your question directly to us at [email protected] and we will be happy to have one of our Certified Social Security Advisors address your question

Nan R
4 years ago

I hope that AMAC is working to STOP TAXING THE SS TAX when we start receiving it!!!

Jane Wilhelm
4 years ago

Thank you very much for your clear explanation of this matter. Another issue that I have tried to find information about is the one involving the death of a spouse prior to retirement age(at 59 y/o in this case), and exactly how the surviving spouse’s options between her/his own retirement SSI and her/his spouse’s SSI works. So far, I have learned that I can receive my husband’s SSI when I become 60 y/o, and then, when I reach full retirement age, either switch to mine or remain on his depending on which is largest. What I don’t know are some of the details of this: 1.) if I begin receiving his SSI, am I still limited in how much income I can earn and if so, what is that limit? 2.) Will my continued earnings make any difference in the SSI I receive if my highest 35 years of earnings are behind me, anyway? 3.) Can I wait till later to switch to mine if it’s higher, or must I switch at age 62?
Thank you very much!

Maria
4 years ago
Reply to  Jane Wilhelm

Your questions are all valid ones but I would think you would get the answers you’re looking for by contacting the Social Security Dept. directly. Anyone reading your post could give you answers but they could probably be more confusing, so why not go directly to the source…SS? Just a friendly advice.

Jane Wilhelm
4 years ago
Reply to  Maria

I have and will again upon becoming 60 years old, but prior to that time, they are very protective of their information and sometimes don’t seem to know. Maybe it is just too far in the distance to be sure.

Jane Wilhelm
4 years ago
Reply to  Maria

Also, thank you for you consideration.

CliffTx
4 years ago
Reply to  Maria

Sorry to disagree Maria, but the SS personnel don’t know sick ’em from come here about 90% of the advice Jane is requesting. Go to at retirement financial advisor near you. It will save / gain you a ton of money over relying on SS advisors. Once you make your choice and file, it’s all over but the shouting…and hundreds (or more) dollars per month that you are owed. The Kotlikoff book mentioned is a good resource as well, but you should have someone with expertise eyes-on your personal situation. Best of luck to Jane.

Jane Wilhelm
4 years ago
Reply to  CliffTx

Thank you. I will also check the book as well.

Ron N
4 years ago
Reply to  Jane Wilhelm

SSI personnel are not allowed to give very much information. Talk to a financial advisor who specializes in retirement planning. They can open up the whole world of SS benefits. AMAC must have someone they can put you in contact with.

Rusty
4 years ago
Reply to  Jane Wilhelm

Please email your question directly to us at [email protected] and we will be happy to have one of our Certified Social Security Advisors address your question

Alan L Patrick
4 years ago

I had a hearing for social security disability and would like to know why when it was one a decision as not made. If I go to a hearing for a traffic ticket verdict is handed down then. I don’t understand hen their own specialist said it should be granted

Randall Lanier
4 years ago

Thanks for the first reasonable explanation I ever heard. Also, why do you have to continue to pay SSI if you are working beyond retirement age.

PaulE
4 years ago
Reply to  Randall Lanier

Because the way the law was written there is no cut-off age where income from work becomes exempt from this taxation. You can work to a 100 if you wish and are actually able to and you would still be paying FICA taxes from your paycheck. Hope this answers your question.

Mary
4 years ago
Reply to  PaulE

If you decide to go back to work, Does the extra FICA translate to a higher S.S paycheck even if you are already receiving a S.S payout. Or do you just payout and get no benefit other than the earned paycheck?

PaulE
4 years ago
Reply to  Mary

Once you start receiving SS, the only way the extra FICA would translate into a higher SS payout is if you were to suspend receiving SS and pay back the SS already received. Then when you eventually decide to really retire, as in stop working, you would start receiving SS again. Not a viable option for most people as they would have to write a big check back to Uncle Sam. Reality is if you chose to work after starting to receive SS, you get no extra benefit from the extra FICA paid.

Rusty
4 years ago
Reply to  Mary

Please email your question directly to us at [email protected] and we will be happy to have one of our Certified Social Security Advisors address your question

Rusty
4 years ago
Reply to  Randall Lanier

Please email your question to us at [email protected] and we will be happy to have one of our Certified Social Security Advisors address your question directly.

David b Aldrich
4 years ago

Great information…easy to understand!

Janice Morrow
4 years ago

Excellent explanation. Thank you Rusty. Just love the information AMAC provides. Great value for the little cost of membership. I will post this to twitter and Facebook too!

Irv C
4 years ago

I’m appalled and disgusted that after last year not receiving an increase on my SS that this year my pitence of $4 a month was immediately taken back from me to pay the $4 a month Medicare increase.
I’m so close to moving to South America where my SS will let me be retired with dignity that I can smell the Mangoes.

Ivan Berry
4 years ago
Reply to  Irv C

Better check out the foreign tax legislation for expatriots first– FATCA (Foreign Account Tax Compliance Act) first.

PaulE
4 years ago
Reply to  Ivan Berry

Exactly Ivan. Most foreign countries do NOT want and will no longer open bank accounts for ex-pat Americans due to the onerous FATCA rules. Another Obama financial reform that was designed to keep their hooks into you, even if you decide to move elsewhere in the world. No savings accounts or checking accounts. Certainly no investment or brokerage accounts. The cost and compliance rules associated with FATCA make Americans essentially persona non-grata. Basically any American deciding to live overseas has to maintain a banking presence in the U.S. and either monthly or quarterly wire themselves money to live on.

So Irv C better do better research before he thinks he can simply escape by moving elsewhere. The IRS reach on U.S. citizens opting to live elsewhere is now global via FATCA and made U.S. citizens the least desirable banking or brokerage customers to have. Yes someone can still live overseas, but Irv C will have to do a lot more planning than simply thinking all he has to do is buy a plane ticket to one of the South American countries,

TomB
4 years ago
Reply to  Irv C

Irv has it right. Frankly, I gave serious thought to not renewing my AMAC card this year. For all the talk and rhetoric coming from AMAC about fixing SS, what really has been accomplished!?? Who has AMAC, Heritage Society, et.al., convinced to move at least a little to our side? I live in very blue state, unfortunately, and my “representatives” (and I use that term loosely) have all kinds of money to support 1,000s of refugees, but can’t seem to find the money for a decent SS increase. I’d like to know what catetgory of health care, food and general living expenses went up only 0.3%?? I couldn’t find any when I checked the current CPS breakdown. With the new administration, maybe something will change, but I have my doubts. Why should congress care about those of us over 65 when they have all those new immigrant votes on which they can rely?

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