Calculating your exact Social Security payout is next to impossible. However, 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.
Calculating Your 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. These are the wages reported to your Social Security number (SSN). Before you try to determine your top 35 years, you need to adjust each year’s earnings for inflation.
To do this adjustment, you will need to visit the Social Security website. Refer to their list of the yearly national average wages and wage indexes. Your earnings, adjusted for inflation, equal the national average wage of the year you turn 60. This is 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. First, determine your yearly incomes and figure out the 35 highest incomes. Then, 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.
Social Security Primary Insurance Amount (PIA)
Social Security provides more assistance to low-income individuals than those with higher earnings. So, your benefits are subject to what the SSA refers to as bend points. These points are also adjusted yearly according to inflation. Therefore, bend points from whatever year you turn 62 help 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. So, this is the monthly amount you will get if you wait until full retirement age (FRA) to draw Social Security.
If you want to receive your full PIA, you will need to wait to start using your benefits. At your full retirement age, usually 66, you will receive your full PIA. So, 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 lower by 5/9 of 1% monthly. For those over 36 months away, this reduction still applies, but any months over 36 reduce by 5/12 of 1%. 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 increase by 2/3 of 1% 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. Therefore, if you wait to receive benefits, your PIA will likely increase for yearly cost of living adjustments (COLA). However, even if you start using your benefits at 62, your monthly payout will still increase periodically. The SSA’s determined COLA will calculate your payout to compensate for inflation.
You can find more information on the Social Security Office Website: https://www.ssa.gov/oact/COLA/Benefits.html
Replace Your Social Security Card
Before looking for your Social Security Benefits, you will need to make sure to have your Social Security Card ready. Losing your card is pretty common, it happens to all of us at least once!