You’re going to retire in the relatively near future. You intend to get some or all of your retirement income through social security benefits. How will that work? Many people aren’t quite sure how the Social Security Administration calculates their benefits. If you don’t understand that, then you might not know how much post-retirement income you can expect. And without that information, it’s very hard to plan for the future.

How Social Security Benefits Are Calculated

The Social Security Administration explains that they calculate social security benefits by taking the following into consideration:

  • The amount of money that you have earned in your lifetime from employment.
  • They adjust this amount to consider how average wages of changed over the years.
  • They base the adjustment on the 35 years you earned the most money during your lifetime.

Then it says, “we apply a formula to these earnings and arrive at your basic benefit” amount.

While the words sound straightforward, this is all a little bit confusing. After all, you probably don’t know how to adjust your wages for changes in wage rates across thirty-five years of employment. Moreover, this tells us nothing about the “formula” they apply.

Digging Deeper Into These Calculations

In order to better understand, we need to dig deeper. The Social Security Administration publishes an Annual Statistical Supplement that includes an appendix that provides us with more information about how social security benefits are calculated. The 2019 version explains that a basic calculation:

  • Assumes that you didn’t take any disability time during your working years. Further assumes that you didn’t work after becoming eligible for retirement.
  • They use “wage indexing” to calculate your lifetime earnings. This is how they figure out what you earned, adapting decades-old wages to modern standards of living. They base the adjusted amount on the year that you turn 60. For example, as of 2017, someone who earned $20000 in 1990 would have that count as over $47,000 towards their lifetime earnings based on the “wage indexing” math. You can see further examples of Wage Indexing math on this page.
  • Now about that “formula” – this is a weight of giving weight to “provide a higher replacement of earnings for lower-wage workers” in retirement. The SSA says that “the formula for persons aged 62 in 2019 is 90 percent of the first $926 of AIME; plus 32 percent of the next $4,657; plus 15 percent of the AIME over $5,583.”

So, as we dig deeper, we see that social security benefits are calculated based on what you earned (at today’s current value for those earnings) for the 35 highest-paid years of your career. This number is then adjusted with that “formula.”

What Can Change These Basic Social Security Benefits?

However, additional things can increase or decrease your basic benefits. Varied factors include:

  • Early retirement; if you retire at age 62, you can still get benefits but they’ll be lower than if you wait to retire until age 65
  • Late retirement; if you retire later than 65, you’ll typically increase the amount of benefits you can receive
  • Continuing to earn money after age 61 but still retiring at 65
  • Long periods of not working during your working years
  • Cost-of-living adjustments for the years after you’ve turned 65
  • Military service, pensions, railroad work and other factors that impact the Social Security tax you’ve paid

This is complicated stuff. No wonder many people aren’t sure how social security benefits are calculated! There is a worksheet here that can help you calculate all of this.

Get an Estimate of Your Social Security Benefits

The link above will take you to a worksheet that you can print out and fill in yourself. It should provide you with an accurate representation of what you can expect to earn in social security benefits. However, if that’s too much work for you at the moment, you might instead wish to use the Social Security Administration’s Retirement Estimator.

This is not going to give you the exact number. It fails to take into consideration many of the more complex details about how social security benefits are calculated. That said, it can give you a good starting point to guess what you are likely to earn in social security income. To keep things even simpler, although perhaps not quite as good of an estimate, the SSA also offers a Quick Calculator.

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