CALCULATE YOUR MONTHLY SOCIAL SECURITY PAYMENT
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 2.A8 at www.socialsecurity.gov/policy/docs/ statcomps/supplement to find 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 reached 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." In the table, find the year of employment on the left and the year you turn 62 at the top. The intersection will determine the indexing value for that year’s income. Just take your earnings times this number and that is what’s used for that year.
An example, say you turn 62 in 2020. In 1980 (when you were 22) your earnings were 15,000. You would multiple this by 4.1671768 (on page 2.14 of the 2022 version) giving a total of 62,507.65. This is the amount you would use for that year’s indexed earnings.
The formula uses your 35 highest indexed years of 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.
- 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.
Your AIME is then used to determine your basic Social Security retirement benefit, which is officially referred to as your primary insurance amount, or PIA. This is the number that, along with your age at the time you apply, determines your initial Social Security benefit.
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. The thresholds change with inflation, so make sure you use your year’s bend point amounts. 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.
A recap
So, in short, the process used to determine your actual Social Security retirement benefit is as follows:
Your average indexed monthly earnings, or AIME, are calculated as the average of your 35 highest-earning inflation-indexed years, divided by 12.
Your AIME is applied to the Social Security benefit formula, using the bend points that were in effect for the year in which you turned 62.
Any applicable cost-of-living adjustments are applied to your PIA, based on the year in which you actually claim your retirement benefit.
Finally, if you choose to start your benefits at any age other than your exact full retirement age, your monthly benefit will be adjusted up or down.
REF: The Motley Fool https://www.fool.com/retirement/2018/05/26/heres-how-the-social-security-retirement-benefit-f.aspx