How to Determine Your Retirement Benefits Amount

How does the Social Security Administration (SSA) calculate benefits? For those nearing the age of retirement, somewhere between 62 and 67 years of age, Social Security benefits for retirees are calculated based on various factors.

Understanding how to calculate Social Security benefits is an important part of receiving retirement benefits and getting the most out of your retirement. Essentially, planning for retirement, makes things go smoother from the start and carry through in the end.

Estimating Your Social Security Retirement Benefit Amount

You should have an estimate of your Social Security retirement amount, no matter what age you are. Knowing how Social Security benefits are calculated can allow you  to determine an accurate estimate. Having this knowledge will help you prepare in advance for retirement, as you gauge your savings and investments progressing toward the age of retirement. It will allow you to outline a preliminary retirement budget that can adequately support your lifestyle plan.

Planning retirement can also help you decide if you want to retire early for a decrease in benefits or work longer for a slight increase in benefits. Planning ahead will help you to determine the legal retirement age based on your birth year.

The Social Security Retirement Amount Formula

When learning how to calculate Social Security benefits, it is important to understand that the foundation of one’s benefits is their lifetime earnings. The SSA then adjusts or indexes these earnings according to fluctuations in wage averages since the year the earnings were obtained.

Related Article: Supplemental Security Income (SSI) for Seniors

An average of these monthly indexed earnings over the highest earned 35 years of employment is taken. A formula is then applied to the average, and the recipient’s primary insurance amount is realized. This basic benefit amount is the amount the earner would receive at the age of full retirement.

What is the maximum Social Security retirement benefit?

Due to the most recent adjustments to the national index, the maximum Social Security retirement amount is just under $2,800 per month. But in order to receive this maximum amount, your work credits must also be maxed out.

Factors That Affect Social Security Requirement Amount

An individual’s retirement benefit amount is affected by additional factors outside of indexing. It is for this reason that financial advisors suggest an estimated SSA benefits amount be taken as a loose guide for retirement planning and not a concrete amount. When calculating estimated benefits, keep these variables in mind:

  • Age you receive benefits: This can increase or decrease benefit amount
    • Early retirement is available to seniors as early as 62 years of age, but the benefit amount is paid at a reduced rate.
    • Delayed retirement is extended beyond the full retirement age and can come as late as 70 years old and increase benefit payments.
  • Your eligibility for cost-of-living benefit increase beginning at 62. Even if you do not receive retirement benefits until you are as much as 70 years of age, you will still begin earning this at 62.
  • You may inherit or become heir to funds from another source, spouse or even ex-spouse.
  • Laws change or are modified from time to time, and this can affect your benefit amount.
  • Depletion of Social Security fund: It is projected that the Social Security reserves will be depleted of funding by 2034 and the accounts will have only enough to pay out $0.79 on the dollar for benefits payable.
  • Wage reports: the SSA logs 250 million wage reports from various businesses across the country each year. Sometimes these reports are logged in the later part of the year, although they may have occurred previously. Furthermore, they do not necessarily get submitted in order or by individual, but rather in bulk from corporations.
  • Military service, railroad employment or pension earnings are indexed by a different formula, and thus, retirement benefits and estimates end up different than they are for other occupations and industries.
  • Other types of earnings that have alternative benefit outcomes due to extenuating circumstances or specialized laws that affect the payment into Social Security accounts or calculation of benefits. Industries and occupations which are affected by these various laws and conditions include the following:
    • Farm work
    • Household employment (e.g. a gardener, babysitter or cook)
    • Religious or nonprofit institutions
    • Self-Employment
    • Local and state government employment
    • Employment by another country (inside the U.S.)
    • Employment outside the U.S.

How to Calculate Social Security Benefits If You Are Still Working

It is possible to receive a decreased Social Security benefit amount if you want to retire but still work. The only condition is that if you make over the annual limit maximum, you will lose one dollar for every two dollars you make over that limit. Recent annual limits are around $17,000. Additionally, during the year you retire, up until you retire, one dollar is deducted from benefits for every three dollars earned over the annual limit, currently around $45,000.

What is the maximum Social Security taxable earnings?

Whether self-employed or on the payroll, there is a ceiling of earnings that maxes out the Social Security amount on which you can be taxed. Though this amount changes often and has increased by roughly $10,000 in three years, most recently, it was set just under $130,000.

Additional Social Security Benefits Retirees May Be Eligible For

There are dozens of alternative Social Security retirement benefit options that you may qualify for. Qualifying for one or more of these benefits will increase your benefits, but this may also decrease your original benefit amount. You can adjust the benefits to make a custom retirement package that optimizes your retirement benefits across the board.

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