Social Security is an important part of our retirement. Most baby boomers rely on Social Security to provide them with income after they have reached a certain age. Whether they have retired or can no longer work due to a disability, Social Security is a safety net that provides them with necessary income. However, the extent of Social Security benefits can often be unclear. Fortunately, there are many tools available that can help you find just how much you’re going to receive. Let’s look at how Social Security works first to understand how benefits are distributed before we jump into how to calculate your Social Security benefits.
How Social Security Works
Social Security works by collecting mandatory financial contributions from workers across the U.S.A. and distributes those contributions for people who are eligible for Social Security. A portion of your paycheck is taken out and given to Social Security each month. This provides necessary finances for those who are retired or unable to work due to a disability. Once you are eligible to receive benefits, you can apply for Social Security to begin collecting them and not have to worry about paying Social Security taxes at all.
When Can I Collect Social Security?
Once you have reached the age of 62 and are able to retire, you can begin collecting Social Security benefits. If you are disabled before the age of 62 you may be able to begin collecting Social Security benefits as well. However, do note that individuals who are disabled go through a rigorous screening process to determine if you are eligible to receive Social Security.
To receive Social Security benefits, an individual must earn credits. These credits are earned throughout the years that they have worked and count towards how much Social Security they can collect. You will receive a credit for every $1,300 you earn. However, you will only be able to earn four credits per year. You need 40 credits to qualify for retirement benefits if you were born after 1929. This qualifies as 10 years of work on average. Fortunately, fewer credits are required if you qualify for disability benefits.
Social Security Calculator
Let’s look at just how much you can collect from Social Security when you become eligible for retirement benefits. Your base earnings are factored by your lifetime earnings. Depending on what year you began working, your maximum benefits are determined by an index factor that fluctuates depending on what year it is. Social Security will then calculate the average indexed monthly earnings based upon the 35 years of labor that you earned the most money. These earnings are adjusted to reflect today’s wages. This means that you will receive the appropriate payout depending on what year it is.
Once this is factored, the total highest amount you earned in 35 years is averaged out and then divided by how many months were in those 35 years. This leads us to the Average Indexed Monthly Earnings (or the AIME for short). Then, the Social Security benefit formula is added to your AIME. This leads to the Primary Insurance Amount or the PIA.
Here is how the formula goes. Keep in mind, this is a basic formula for individuals deciding at the age of 62. This formula will vary depending on how old you are.
- Take your AIME and round down to the nearest dollar
- Multiply the first $895 of your AIME by 90%
- Multiply the amount in step 2 that is over $895, or less than or equal to $5,397, by 32%
- Multiple the amount in step 3 over $5,397 by 15%
- Add all totals from step 2-4 and round down to the nearest dollar. This will be your full retirement benefits at age 66.
- Multiply the amount in step 5 by 73.33%. This will be what you receive monthly once you retire at age 62.
For more information, check out our Social Security Benefit Calculator.