Financial planning tools and services to put you on the path to the future you want
Your guide to financial planning and retirement
Connect with peers and experts
Get to know the people behind the company and the mission behind the work
Offer financial wellness to the people at the heart of your business
March 4, 2015
Your years of hard work are one factor in how much your Social Security benefits will ultimately be.
You can reasonably count on Social Security benefits once you retire, but determining how much you’ll receive is a different story. There is a formula, of sorts. But as Mark Miller for Morningstar explains, it’s still complex.
Although you might not come to a precise dollar amount in predicting your benefits, it’s still interesting to learn how they are computed. It’s definitely not random, and the factors used by the Social Security Administration can change every year.
Here’s an overview of how it’s done:
Primary Insurance Amount at Full Retirement
Your Primary Insurance Amount (PIA), according to the Social Security Administration’s PIA page, is the dollar amount benefit that you should receive if you retire at the full retirement age – not early, and not delayed. Full retirement age is 65.
If you choose to retire early, you can do so and receive Social Security benefits as young as age 62. However, your potential full benefit amount will be reduced if you take it early, between 62 and 65. Conversely, you can decide to take delayed retirement at age 70. If you go that route, your benefits will be higher than they would at early or full retirement age, but delaying past 70 won’t result in a higher benefit.
Social Security benefits are based on your highest earning years.
Finding Your Average Indexed Monthly Earnings
Before your benefits are calculated, the Social Security Administration determines your Average Indexed Monthly Earnings or AIME. This is tricky. All of your earnings up to age 60 are indexed using the Average Wage Indexing Series, which compares them to earnings across the U.S.
For PIA purposes, your highest 35 years of earnings during that time period are averaged. If have fewer than 35 years worth of earnings when you reach 62, your highest years are used. Zeroes are then added to fill in for the years with no earnings, which can dramatically reduce your AIME.
You can check your current status at the Social Security website any time, no matter how far away retirement happens to be.
Bend Points and Calculating PIA
The PIA formula for your benefits hinges on something called “bend points.” The name is just an explanation of how the dollar amounts that factor into your benefits look if they’re marked out on graph paper. When the dollar amounts are set as points on a graph, and a line is drawn to connect those points, it creates a bend. Thus, bend points.
According to the Social Security Administration, your PIA is derived from three different percentages of portions of your AIME, and they are your three bend points. Although they can vary, in 2015, the percentages and portions of AIME are 90 percent of the first $826 of your AIME, 32 percent of any amount between $826 and $4,980, and 15 percent of AIME that’s over $4,980.
Even with these calculations, benefits will vary. Bend points change, and there are programs that also affect benefits.
For example, there’s the Special Minimum Benefit Provision, which helps ensure that even low earners receive adequate benefits, and Auxiliary Benefits, which is a program for family members of some disabled persons.
Knowing how benefits are calculated can help you understand the process better. But there’s no simpler, faster, or more effective way to learn what your benefits will be than to register online with the Social Security Administration. By entering just a few details about yourself, you will see in seconds exactly what your benefits are projected to be as of today’s date.
NewRetirement offers numerous tools that help you plan for the future. In fact, you can begin by using our retirement calculator, and see how your savings, investments, and Social Security benefits will sustain you.
If your goals are on track, you’ll see it in black and white. And if they’re falling a bit short, you’ll see suggestions for ways to improve. Try it today, and see how NewRetirement is taking the guesswork out of retirement planning.
Do it yourself retirement planning: easy, comprehensive, reliable
Take financial wellness into your own hands and do it yourself retirement planning: easy,
Share this post:
Our weekly newsletter full of inspiration, podcasts, trends and news.
© 2023 NewRetirement, Inc. All rights reserved.
Disclaimer: The content, calculators, and tools on NewRetirement.com are for informational and educational purposes
only and are not investment advice. They apply financial concepts in a general manner and include
hypotheticals based on information you provide. For retirement planning, you should consider other
assets, income, and investments such as equity in a home or savings accounts in addition to your
retirement savings in an IRA or qualified plan such as a 401(k). Among other things, NewRetirement
provides you with a way to estimate your future retirement income needs and assess the impact of
different scenarios on retirement income. NewRetirement Planner and PlannerPlus are tools that
individuals can use on their own behalf to help think through their future plans, but should not be
acted upon as a complete financial plan. We strongly recommend that you seek the advice of a financial
services professional who has a fiduciary relationship with you before making any type of investment or
significant financial decision. NewRetirement strives to keep its information and tools accurate and up
to date. The information presented is based on objective analysis, but it may not be the same that you
find on a particular financial institution, service provider or specific product's site. All content,
tools, financial products, calculations, estimates, forecasts, comparison shopping products and services
are presented without warranty.