How to Calculate Social Security Benefits?

A difficult formula determines how your social security benefits are calculated.The following factors go into the formula

Inflation
How long you work
How much you make each year
At what age you start getting your benefit

Had a glance how these factors affect the benefits you will receive and how the Social Security Administration count its data

Table of Contents

How is Social Security Calculated

There is a three step method used to count the amount of Social Security benefits you will receive

First Step

Use your earning history to calculate your Average Indexed Monthly Earnings (AIME).

Second Step

Use your AIME to calculate your primary insurance amount PIA.

Three Step

Use your PIA and adjust it for the age when you will begin receiving benefits.

First Step Calculate Your Monthly Earnings

Your Social Security Benefit calculation starts by looking at how long you worked and how much you made each year. It is used to calculate your AIME.

List Each Year Earnings

Your earning history is shown on your social security statement.

Suitable for Inflation

Social Security uses a method called wage indexing to determine how to adjust your earning history for inflation.Each year Social Security publishes the national average wages for the year.

Your wages are indexed to the average wages for the year you turn 60. For each year you take the average wages of your indexing year divided by average wages for the year you are indexing and multiply your earnings by that number.

Average the Highest 35 years

The Social Security Benefits uses your highest 35 years of earning to calculate your average monthly earnings.If you do not have 35 years of earning a zero will be used in calculation which will lower the average.

Second Step Calculate Your Primary Insurance Amount

Once you calculated your average indexed monthly earnings AIME, you will plug that number into a formula to decide your primary insurance amount or PIA. This formula is based on something called bendpoints.

Social Security Bend Points

The Social Security benefits formula designed to replace a higher proportion of income for low income earners than for high income earners. To do that the formula uses are called bend points which are adjusted for inflation each year.

The result is your primary insurance amount or PIA the amount you will receive if you get benefits at your Full Retirement Age FRA.

Your PIA is rounded to the next lowest dollar and your benefit amount is rounded to the next lowest dollar.