How does Social Security calculate my benefits?


Q. If you stopped working at 60 but you don’t collect Social Security until 70, will there be an increase in payout between collecting at 66 or waiting until 70 even though you have not contributed to the system for 10 years?
— Hoping for more

A. It’s important to know how your Social Security benefit is calculated.

Social Security first calculates your Average Indexed Monthly Earnings (AIME), said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

“This is essentially your average income that you earned throughout your lifetime after it’s been adjusted for inflation,” she said.

Social Security only uses the highest 35 years of earnings in this calculation. These don’t have to be a consecutive 35 or last 35, just the highest 35 years, she said.

“If you worked less than 35 years because you retired early or took time off to raise your children, your earnings will be $0 for those years,” she said.

Next, Social Security applies a formula to your AIME to calculate your Primary Insurance Amount (PIA), she said.

“PIA is the value of your benefit that you would receive at your full retirement age (FRA),” she said. “Your FRA depends on when you were born. If you were born before 1954 or earlier, your FRA is 66. The age then increases by two months for every year until you get to 1960 and later when the FRA is 67.”

How much you receive in Social Security retirement benefits will depend on your PIA and when you claim your benefits, Kane said.

You can claim as early as 62. If you claim at this age you may get more checks over time, but the benefit will be permanently reduced by as much as 30%, Kane said.

“For every year after your FRA that you claim, you get an 8% bump in your PIA benefit. That’s on top of any cost-of-living adjustment,” she said. “There is no benefit for claiming after 70. Your benefit is maxed out.”

Waiting to claim at 70 will give you a guaranteed 8% increase per year above your PIA at your FRA. It doesn’t matter when you stopped working, she said.

Let’s assume that your FRA is 67. If you wait to claim until you’re 70, your benefit will be 24% higher than if you claimed at 67, she said.

“We generally recommend that if you can afford to, that you should wait as long as possible to claim your benefit,” Kane said. “That’s because you are guaranteed an 8% increase in your benefit each year you wait after your FRA — ‘guarantee’ being the key word here. You can earn 8% or higher return on your investments in a given year but there are few investments that guarantee it.”

Kane said this is particularly important if you’re married. When one spouse dies, the surviving spouse claims the higher of the two benefits. They don’t get to claim both.

“If you were the higher earner, you should max out your benefit, so your spouse receives the highest amount possible when they’re surviving on only one Social Security benefit,” she said. “Social Security retirement benefits can be confusing so it is always best to set up an appointment with the Social Security Administration to understand your specific benefits.”

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This story was originally published on August 18, 2021. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.