A difficult formula determines how your social security benefits are calculated.The following factors go into the formula
- 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
How is Social Security Calculated
There is a three step method used to count the amount of Social Security benefits you will receive
Use your earning history to calculate your Average Indexed Monthly Earnings (AIME).
Use your AIME to calculate your primary insurance amount PIA.
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.
Third Step Adjust Your PIA for the Age you will start Benefits
The final amount of Social Security retirement benefit that you receive is based on the age when you start benefits
Can Your PIA Change After You Reach Age 62?
There are two things that affect your PIA after you reach age 62.
Earning in years between 62 and 70 that are higher than that of 35 highest earning years will change your AIME.It is used in PIA formula.
Your PIA will be adjusted by the same cost of living adjustments applied to people who are already Social Security Benefits.