Determining Your Social Security Retirement Income Amounts

anticipate likely securing some financial assistance from the government during retirement, yet the precise sum relies on the Social Security benefits formula. However, several individuals are unaware of how this formula operates or when it applies. Fear not, as grasping this concept is straightforward once you're comfortable with some straightforward mathematics. Below, we will delve into this matter step by step so you can have a better idea of the funds you might receive.

What is it?

The Social Security benefits formula serves as a guideline for the government to calculate your Primary Insurance Amount (PIA), which is the amount you're entitled to receive at your Full Retirement Age (FRA). For those born in or after 1960, this age is 67.

Before the government can utilize the benefits formula, they must ascertain your Average Indexed Monthly Earnings (AIME). This figure represents the average monthly earnings from your 35 highest-earning years, adjusted for inflation. We will delve more into this calculation below.

Once the federal government understands your AIME, it implements the Social Security benefits formula for the year you reached 62. The result is your PIA. However, keep in mind that this isn't always equivalent to your monthly benefit.

Various individuals choose to apply for Social Security ahead of or beyond their FRA. If you opt to apply early, you will become eligible for payments as soon as you turn 62. You'll receive more checks this way; however, each one will be smaller. Alternatively, you can defer benefits and observe a slight increase in your payments each month until you reach your maximum benefit at age 70.

In both scenarios, the government performs supplementary calculations to determine the appropriate adjustments to your PIA in order to ascertain your final monthly benefit.

Formula

The Social Security formula for those born in 1962 (which applies to 2024) consists of the following steps:

Multiply the first $1,174 of your AIME by 90%.
Multiply any amount between $1,174 and $7,078 by 32%.
Multiply any sum exceeding $7,078 by 15%.
Sum up the results from steps 1 – 3 and round to the nearest $0.10.

For example, if your AIME was $3,000:

Multiply the first $1,174 by 90%, yielding $1,056.60.
Multiply the residual $1,826 by 32%, rendering $584.32.
Multiply any value greater than $7,078 (none in this instance) by 15%, resulting in $0.00.
Add up the results from steps 1 – 3, giving you $1,640.92.

In the formula above, $1,174 and $7,078 are identified as bend points. These are the only elements of the Social Security benefits formula that change annually. In 2025, these thresholds will rise to $1,226 and $7,391, respectively. You can locate the bend points for any prior year on the Social Security Administration's website.

Calculating your benefits

Should you simply desire to comprehend the size of your Social Security payments at a certain age, you can grasp this by creating a my Social Security account. However, if you yearn to grasp how the government derived this figure, you can replicate their work by following these steps:

1. Identify your wages for each year you've worked

The federal government maintains a record of the Social Security taxes you've paid on your earnings for each year. This information is accessible in your my Social Security account.

Most people report the same income as what they've earned and the amount they've paid Social Security taxes on. However, this isn't always the case for high earners, where the ceiling on income subject to these taxes increases each year. In 2024, this limit is $168,600, increasing to $176,100 for 2025.

2. Adjust your wages for each year for inflation

The government employs the Average Wage Index (AWI) to account for inflation and accurately determine the years with the highest earnings. You can find the AWI for all previous years since 1951 on the Social Security Administration's website.

The AWI you apply to adjust your wages is the one that was in effect when you reached 60. Divide this AWI by the AWI for the year you're adjusting wages for. This yields your index factor. Afterward, multiply this by your income from your earnings record for that year to acquire your index-adjusted earnings.

For instance, if you turned 60 in 2022 (consequently eligible for benefits in 2024), you would use the 2022 AWI of $63,795.13 as your reference. If you earned $50,000 in 2015 and you wish to calculate your index-adjusted income for that year, you would:

Divide the 2022 AWI by the 2015 AWI, resulting in an index factor of 1.0825.
Multiply this index factor by your 2015 earnings of $50,000, rendering $54,125.

This process is crucial in accurately estimating your Social Security benefits. Keep in mind that you should update your AIME as well as your PIA calculations with new bend point figures each year.

Divide the 2022 Average Wage Index (AWI) of $63,795.13 by the 2015 AWI of $48,098.63, resulting in an index factor of approximately 1.326.

Then, multiply your $50,000 income from 2015 by this index factor (1.326) to obtain an index-adjusted income of $66,300 for that year.

If you find this mathematical process complex, you can directly utilize the indexing factors provided by the Social Security Administration. Simply input the year you turn 60 to obtain the required indexing factors. Then, just multiply these factors by your income for the relevant year.

Calculate your Adjusted Income for Earnings (AIME)

After adjusting your income considering inflation, sum up your earnings from your 35 highest-earning years. In case you worked fewer than 35 years, aggregate your total income for all the years you've been employed.

Next, divide this total by 420 (the number of months in 35 years), which will yield your AIME. Lower values may result if you didn't work for 35 years due to zero-income years being factored into your calculation.

Apply the Social Security retirement benefits formula

With your AIME in hand, insert it into the formula for Social Security retirement benefits as per the instructions outlined above. Ensure you use the correct formula for the year you turned 62, regardless of the age at which you chose to apply for benefits.

The results obtained from this step equate to your Primary Insurance Amount (PIA). If you opt for benefits at your Full Retirement Age (FRA), this amount is also your benefit. However, should you sign up before or after the FRA, additional steps are required for calculating your monthly benefit.

Adjust your PIA as needed

To accomplish this step, determine your FRA. The following table will help you understand your FRA based on your birth year:

In case you apply for benefits prior to your FRA, the government reduces your checks by:

5/9 of 1% per month up to 36 months
5/12 of 1% for each additional month if you apply more than 36 months early

For example, in case your FRA is 66 and you applied at 62, you would lose 5/9 of 1% from your checks for each of the first 36 months you applied early. Multiply (((5/9) x 0.01) x 36) x 100, resulting in a 20% reduction. Nevertheless, that's not all.

A chart outlining the complete retirement age for individuals born between 1943 and 1959, as well as individuals born in or after 1960.

Then, you must add an additional 5/12 of 1% monthly deduction for claims between 62 and 63. Multiply (((5/12) x 0.01) x 12) x 100, resulting in an additional 5% decrease. The cumulative result of the two steps above amounts to 25% smaller checks for claiming at 62 as opposed to waiting until 66.

For those who opt to delay benefits beyond their FRA, the process is similar. You add 2/3 of 1% per month for each month you delay beyond your FRA. However, this only continues until you reach 70, at which point your benefit will no longer increase.

Subtract your Medicare Part B premiums if necessary

The foregoing steps determine the Social Security benefit entitlement based on your work history and claiming age, but it may not match your take-home benefit. Seniors enrolled in Medicare have their Part B premiums automatically deducted from their Social Security checks.

In 2024, this amounts to $174.70 per month; however, it will increase to $185.00 in 2025. If you're not yet on Medicare, you won't need to consider this until you sign up for it.

Round your benefit quantity down to the nearest dollar

The final step in calculating your take-home Social Security benefit is rounding your calculation from Step 6 down to the nearest dollar. Even if your results from the prior step were $1,680.99, you would still round down to $1,680 rather than round up to $1,681.

On cost-of-living adjustments (COLAs)

Every year, the government administers a cost-of-living adjustment (COLA) to assist seniors in maintaining their Social Security checks in line with inflation. However, it does not apply the COLA to your take-home check. Rather, it adds it to your Primary Insurance Amount (PIA).

If you wish to estimate your check size for the following year, look at your PIA for the current year and multiply it by the COLA. For instance, the 2025 COLA is 2.5%, so you would multiply your 2024 PIA by 1.025 to determine your 2025 PIA. After that, follow the steps 5 to 7 above to determine your revised take-home benefit for the following year.

Understanding how your FRA impacts your benefit calculation can aid in selecting the optimal time to enroll. This relies on your life expectancy and financial situation.

To calculate your benefit at various ages, follow these steps: calculate your benefit at each claiming age, then multiply these monthly benefits by 12 to get your estimated annual benefit. Next, multiply this figure by the number of years you anticipate claiming to obtain your estimated lifetime benefit. For instance, if you assume a $2,000 monthly check at your FRA of 67 and estimate living until 87, your expected lifetime benefit would be $480,000.

Connected retirement topics

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🔗#### The bottom line

Even though the Social Security benefits formula might seem complex, it's simpler once broken down. If you're too young for Social Security, keeping these guidelines in mind can help maximize your program benefits.

Keri Dogan

Senior Vice President of Retirement Solutions, Fidelity Investments

/Our Website: Because of the COVID-19 pandemic, many Americans now fear they won’t be able to retire. What is your advice for someone who may be worried about retiring because of recent financial setbacks?

Keri Dogan: Concerns about retirement income are growing among Americans nearing retirement, many worrying they won’t have enough for a lifetime. This is especially true in the current environment, with the pandemic and market volatility and inflation on everyone's mind.**

For those still in their saving years, retirement savers concerned about market volatility might be reassured to know that consistent contributions over even a relatively short time can significantly impact retirement readiness. For example, if you invest the 2021 maximum $6,000 IRA contribution at age 25 consistently until age 70, you would have accrued $1,440,592 by retirement. Even over shorter periods, as Fidelity's research indicates, the typical 401(k) balance for those with continuous employment with the same employer for five years is more than twice the average retirement account balance.

For those near or entering retirement, a generally recommended approach is to cover day-to-day necessities like housing, food, and healthcare with lifetime guaranteed income sources, such as Social Security, pensions, or income annuities. If possible, use withdrawals from savings for non-essential expenses. The age at which you retire is important too. Most people can begin collecting Social Security benefits at age 62, but benefits increase if you wait until your full retirement age (typically 67) and further if you delay until age 70. Retiring early means relying more on savings to cover income needs because Social Security payments will be lower. So, consider delaying retirement and drawing down Social Security until ages 67-70 if possible, and consider working part-time in retirement.

Our Website: *According to a recent survey by Our Website*, men were most likely to say, "I rely on Social Security benefits a little," while women were most likely to say, "I rely on them a lot." Men were also more likely to be "slightly worried" about losing their benefits, whereas women were most likely to be "very worried." Why do you think men seem to fare better than women in retirement years and have more confidence in their financial stability? What are the potential implications of this trend?

Keri Dogan: One possible reason could be that women live longer on average, meaning their income must last longer too. With longer lives come more expenses in retirement, especially higher healthcare costs.

Because women live into their mid-90s, Social Security is essential for retirement income. Understanding Social Security eligibility and best times to claim is crucial for maximizing monthly benefits. The decision to take early retirement benefits will permanently impact the amount received each month.

This trend might be due to women's historically lower salaries, lack of retirement savings, and responsibility for long-term care, which leads to financial vulnerability in retirement. Understanding the reasons behind this trend and taking steps to close the retirement income gap is crucial for ensuring financial security in retirement for both men and women.

Women often require a comprehensive retirement plan more than men due to various factors, yet only 68% of women admit to having one in place, as per Fidelity's research. Planning can significantly enhance a sense of financial well-being, and our observations show that increased planning brings about an improved sense of confidence in both short-term and long-term aspects. Despite men feeling they have more control over their financial lives, women's confidence matches that of men once they have a financial plan in place.

User's Question: When asked about the 8.7% cost-of-living adjustment for Social Security benefits in 2023, 55% of respondents stated they didn't think it was enough. Why do you suppose retirees feel this way, considering it's one of the largest COLAs in history? Did the SSA commit an error by not raising it more?

Keri Dogan's Response: This year's increase, being the largest in decades, undoubtedly provides a decent boost to many retirees, particularly those who rely on Social Security to manage their expenses.

The increase may help minimize the effects of high inflation on retirees dealing with escalating costs, like fuel and food. However, retirees encounter significant financial pressure when it comes to healthcare expenses. Moreover, retirees have shown a remarkable talent for cutting back on both essential and non-essential expenses and have been adopting such practices even during the pandemic.

While retirees' concerns about the size of the increase may be justified, our recommendation to retirement savers or retirees themselves is to try and not stress too much. Given our knowledge of retirees and their overall satisfaction upon reaching retirement, the majority do not overspend and are content with their current financial situation. In fact, Fidelity's analysis of spending data reveals that most people need to replace between 55% and 80% of their pre-tax, pre-retirement income to maintain their standard of living in retirement.

Website's Disclosure Policy: (Same as given)

Due to the Social Security benefits formula, individuals born in 1960 and above, who have reached their Full Retirement Age (FRA) of 67, are entitled to a Primary Insurance Amount (PIA) calculated based on their Average Indexed Monthly Earnings (AIME).
Understanding the Social Security benefits formula is crucial, especially since various factors, such as when you apply for benefits and inflation adjustments, can impact your monthly benefit.

Determining Your Social Security Benefit Amounts

What is it?

Formula

Calculating your benefits

1. Identify your wages for each year you've worked