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Social Security: How Are My Benefits Calculated?

Social Security: How Are My Benefits Calculated?

April 21, 2021

Social security rules can seem as confusing and overwhelming as the tax code, but you don't have to navigate it alone. There are some basic concepts that can get you started. 

Your Social Security benefit amount is based on your work history, specifically your 35 highest years of salary. The key to earning Social Security benefits is to work at least 10 years to qualify for benefits and then try to pack in 35 years of earnings. Once your work history is determined, a complex formula is used that considers your age, amount of earnings, and inflation assumptions. You can learn more about this calculation by clicking here.

The Social Security Administration offers a Social Security Quick Calculator you can use to get a rough estimate of future benefits. You can enter your birthday, current earnings, future retirement date, and whether you’d like to see the results in today’s dollars or inflated (future) dollars. For example:

  • Birthday: February 28,1960
  • Current earnings: $65,000
  • Future Retirement Date: June 2027
  • Monthly Benefit Amount in Today’s Dollars: $1,737
  • Monthly Benefit Amount in Inflated (Future) Dollars: $2,483

In addition to your own benefits, other people in your family will also qualify for benefits based on your work history. These additional benefits include those for your spouse and dependents. While there are numerous benefits for your family members, there is an overall family maximum that you can receive.

If you've been married, you may qualify for benefits off of your spouse's work record. The same is true if you divorced or even if your ex-spouse is deceased. 

Generally speaking, the longer you wait to claim social security (up to age 70) the higher your payments will be. This is because every year between your full retirement age, which is the year you become eligible for full retirement benefits, and 70 years old, your benefit increases by 8%. The increase can have a significant financial impact over your lifetime. 

The opposite is true if you start your social security benefits early. You may be itching to retire and the prospect of collecting social security at 62 might seem like it'll scratch the itch. The downside of starting your benefits before your full retirement age is that you take a haircut on the amount you receive - as much as a 30% reduction - and that can significantly decrease the amount you collect throughout retirement. Knowing your full retirement age can help you make more informed decisions about retirement.

If you - or a friend or loved one - would like to discuss your Social Security benefits, how they’re calculated, and your retirement strategy, please reach out. I'm always glad to help.