Calculating your Social Security retirement benefit requires an understanding of complex SSA (Social Security Administration) rules and formulas. Many Americans do not know these details. The Social Security Administration calculates your retirement benefits based on your earnings history and when you file for benefits. You can use the information in this article and Rick Miller’s prior article to help you understand how to calculate your Average Indexed Monthly Earnings and your Primary Insurance Amount (PIA). You will also learn how to use your PIA to calculate your Social Security retirement benefit.
There are three primary steps to calculate your Social Security retirement benefit:
- Calculate your Average Indexed Monthly Earnings (AIME)
- The monthly average of your highest 35 years’ earnings (indexed for inflation)
- Rick Miller’s article covers this in detail here.
- Translate your AIME into your Primary Insurance Amount (PIA)
- Adjust your Social Security retirement benefit based on when you start receiving benefits relative to your Full Retirement Age (FRA)
Your Primary Insurance Amount (PIA)
Your PIA is the benefit you will receive if you begin your Social Security retirement benefits at your Full Retirement Age (FRA), sometimes called Normal Retirement Amount. Your FRA is the age at which your retirement benefit is not reduced for early retirement.
The SSA determines your FRA by birth year, which has changed over time due to changes in life expectancy and to manage Social Security system financing:
Your PIA depends on your Averaged Indexed Monthly Earnings (AIME). The formula includes two bend points that are adjusted annually. The applicable formula for calculating your retirement benefit is based on the year you turn 62, known as your year of eligibility. Beware, this is not the same as your FRA! Confusing, right? The relationship between your PIA and your AIME is mostly linear, but there are two “bend points” that are adjusted annually (see the graph just below).
2025 is the year of eligibility for anyone born in 1963* (those born on January 1, 1963, use the 2024 formula instead). The PIA for this group of people is the sum of the following:
- 90% of the first $1,226 of AIME ($1,226 is the first bend point)
- 32% of AIME between $1,226 and $7,391 ($7,391 is the second bend point)
- 15% of AIME above $7,391 (up to maximum AIME)
Then, they round the PIA to the nearest $0.10 (always rounding down).
The bend points in this formula are derived from the National Average Wage Index (AWI). This is the index that Social Security uses to index earnings of individuals to calculate their benefits. Social Security calculates the AWI each year using wage data collected for earnings subject to federal income tax and contributions to deferred compensation plans to determine the average (mean) wage. Social Security indexes an individual’s earnings to the average wage level two years prior to age 62.
Social Security retirement benefits are progressive. Those with AIME below $1,226 have the highest replacement coverage at 90% of Social Security covered earnings. Those with AIME higher than $1,226 have less replacement coverage as a percentage of their earnings, and this is emphasized at two other distinct places: the second bend point ($7,391 AIME) and the maximum AIME based on the Social Security wage base ($13,689 AIME).
To review the bend points for any prior year of eligibility, please consult Social Security Administration’s Benefit Formula Bend Points (focusing on the “Dollar amounts in PIA formula” section of the table). If you are not yet 62, the best estimate is using the current year’s formula; but understand your calculated PIA may increase between now and your age 62 (if the average wage index continues to increase).
Let’s work through the calculation of PIA for someone turning 62 this year with an AIME of $8,789. We can calculate their PIA as follows:
90% $1,226 = $1,103.40
+
32% ($7,391-$1,226) = $1,972.80
+
15% ($8,789 – $7,391) = $209.70
PIA: $3,285.90
Determine Your Benefits
To further complicate this matter, the benefits you receive may not exactly match your PIA. Why? The amount of retirement benefits you receive is also based on when you file for benefits. In our example, $3,285.90 would be the benefit amount if that person filed for benefits at their full retirement age. Everyone has the option to start benefits earlier or later than full retirement age. The starting age impacts the benefits they will receive. You have the option to begin benefits as early as age 62 or delay as late as age 70.
Filing for benefits before your FRA is what the Social Security Administration calls Early Retirement. If you decide to start your retirement benefits early, you will receive less than your PIA. Your retirement benefits are reduced by 5/9 of 1% for each month before your FRA up to 36 months. If you claim more than 36 months before your FRA, then your benefits would decrease by 5/12 of 1% per month of early claim for months that are further than 36 months from your FRA. For example, if you start your benefits 48 months before your FRA, your benefits would decrease by 25%. ((5/9*1%*36) +(5/12*1%*(48-36))).
You also have the option to earn delayed retirement credits by waiting until after your FRA to claim benefits. For those born in 1943 and later, delaying retirement benefits earn them an additional 8% per year (or ~0.6667% per month). Someone with an FRA of 67 can delay their retirement benefits until age 70 and receive 124% of their PIA instead of 100% at age 67. There is no rule that requires you to begin your Social Security benefits when you retire from a job. You could choose to retire from work at age 67 and continue to delay retirement benefits until 70 to earn the full amount of delayed retirement credits.
So, when should you claim? Should you delay benefits? See Rick Miller’s webinar here which reviews whether to delay benefits or begin as soon as possible.
Additional considerations
Understanding the formulas for calculating your benefits can help you better understand your projected Social Security retirement income. There are other factors to be aware of like the earnings test and spousal benefits that may also affect your claiming strategy. In short, Social Security is complicated! It’s best to seek specific advice from your advisors who understand your full financial picture.
In addition, retirement benefits are just one category of Social Security benefits. Social Security offers four other major categories of benefits: family, survivors, disability, and supplemental security income. In the articles to follow, I will explain these additional categories of benefits.
Photo by Dan Cristian Pădureț on Unsplash