Do you ever wonder how much retirement income to expect from Social Security?
Many people do not understand how their Social Security retirement benefit works. Understanding this can help you calculate your benefit. Or, Social Security will do it for you (based on existing data). Just go to your MySocialSecurity account and use the Retirement Calculator. If you know how Social Security benefits are calculated, perhaps it can help you make better decisions when you approach eligibility age.
Publication No. 05-10070 explains how your benefit amount is calculated. Prior to 2020, this form contained the income index factors as well as the worksheet. It appears now, you must go to the Annual Statistical Supplement, Appendix D at www.socialsecurity.gov/policy/docs/ statcomps/supplement to calculate your indexing factors.
I'll try to make it easy:
Your benefit is computed from your income information in the year you turn 62. If you work past this, it will be recalculated when you reach your Full Retirement Age (FRA).
1. The first amount to calculate is your 'average indexed monthly earnings' or AIME.
To calculate your AIME, the SSA takes each year of earnings throughout your working lifetime, up to the Social Security taxable maximum for that year. Then, each year's earnings are adjusted for inflation, or "indexed."
The formula uses your 35 highest years of indexed earnings to determine your AIME. The calculation is done by adding the 35 highest years of indexed earnings together (years with zero earned income are added as 'zero'), dividing by 35 to find your annual average, and dividing this result by 12 to determine your lifetime monthly average.
2. Next, find your Primary Insurance Amount or PIA. You use your AIME in the following manner. NOTE: This is for someone turning 62 in 2019. The income indices and PIA change yearly, so your calculations will most likely be different. The publication's Appendix D will take you through all these steps.
To determine your PIA, your average indexed monthly earnings are applied to a formula. For 2019, the formula is:
90% of the first $926 in AIME
32% of the amount of AIME greater than $926, up to $5,583
15% of the amount of AIME greater than $5,583
These percentages stay the same each year (under current law), but the thresholds (known as "bend points") change. These are represented by $926 and $5,583 above. Add these three numbers together to get your PIA.
As you can see, the system favors lower lifetime income levels to provide more relief to workers with less lifetime income.
Here's an example of how this works: Let's say that I'm turning 62 in June 2019 and my average indexed monthly earnings are $5,000. My PIA will be:
90% of the first $926, or $833.40
32% of the remaining $4,074, or $1,303.68
15% of the amount over $5,583, or zero
Combining these three amounts gives me a PIA of $2,137.08 per month. Note that this isn't the actual amount I'd get if I claim at age 62. At 62, there would be a 28% discount (.56% per month times the number of months until FRA). It would be more like $1540.
SCORECARD
At the end of April:
Willie had a month end balance of $191,596.03. His monthly benefit check (including the COLA) would be $2146.75 if he changed his mind and decided to file for benefits at this time.
Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $213,988.57.
Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $215,463.80.