Social Security retirement benefits are calculated based on your lifetime earnings and the age at which you choose to begin receiving benefits. Understanding how the calculation works can help you make more informed decisions about when to retire and when to claim your benefits.
How Social Security works
Social Security is a federal program funded through payroll taxes. Throughout your working life you and your employer each pay Social Security taxes on your earnings. Those taxes fund the benefits paid to current retirees, disabled workers, and survivors. When you retire you become eligible to receive monthly benefits based on your own earnings history.
Your earnings record
The Social Security Administration maintains a record of your earnings throughout your working life. You can view your earnings record at any time by creating a free account at ssa.gov. It is a good idea to review your earnings record periodically to make sure it is accurate because errors in your record can affect your benefit amount.
How your benefit amount is calculated
Your Social Security retirement benefit is based on your average indexed monthly earnings — commonly called AIME. Here is how it works:
- The Social Security Administration takes your 35 highest earning years
- Those earnings are adjusted for inflation using an indexing formula
- The adjusted earnings are averaged to produce your AIME
- A formula is then applied to your AIME to calculate your primary insurance amount — the benefit you would receive if you claim at your full retirement age
If you worked fewer than 35 years zeros are averaged in for the missing years which reduces your benefit amount. Working additional years and replacing low earning years with higher earning years can increase your benefit.
Full retirement age
Your full retirement age — sometimes called normal retirement age — is the age at which you are entitled to receive your full Social Security retirement benefit. Full retirement age depends on the year you were born:
- Born 1943 to 1954 — full retirement age is 66
- Born 1955 — full retirement age is 66 and 2 months
- Born 1956 — full retirement age is 66 and 4 months
- Born 1957 — full retirement age is 66 and 6 months
- Born 1958 — full retirement age is 66 and 8 months
- Born 1959 — full retirement age is 66 and 10 months
- Born 1960 or later — full retirement age is 67
Claiming early — reduced benefits
You can begin claiming Social Security retirement benefits as early as age 62. However claiming before your full retirement age permanently reduces your monthly benefit amount. The reduction is approximately:
- 5/9 of one percent for each month before full retirement age up to 36 months
- 5/12 of one percent for each additional month beyond 36 months
For someone with a full retirement age of 67 claiming at age 62 reduces the monthly benefit by approximately 30 percent permanently.
Claiming late — increased benefits
If you delay claiming Social Security beyond your full retirement age your benefit increases by 8 percent for each year you wait up to age 70. This increase is called a delayed retirement credit. After age 70 there is no additional benefit to waiting.
For someone with a full retirement age of 67 waiting until age 70 to claim increases the monthly benefit by approximately 24 percent compared to claiming at full retirement age.
When to claim — key considerations
The decision of when to claim Social Security is one of the most important financial decisions a retiree faces. Key factors to consider include:
- Health and life expectancy — people in good health who expect to live into their 80s or beyond often benefit from waiting to claim. People with serious health conditions may benefit from claiming earlier.
- Financial need — if you need income to cover living expenses claiming earlier may be necessary regardless of the long term tradeoff.
- Spousal benefits — if you are married the timing of each spouse’s claim can significantly affect the household’s total lifetime benefits.
- Continued working — if you claim before full retirement age and continue working your benefits may be temporarily reduced if your earnings exceed certain limits.
Spousal benefits
A spouse who has little or no earnings history of their own may be eligible to receive a spousal benefit based on their partner’s earnings record. The maximum spousal benefit is 50 percent of the worker’s primary insurance amount at full retirement age.
Spousal benefits can be claimed as early as age 62 but are reduced for early claiming. A spouse cannot claim a spousal benefit until the worker has filed for their own benefit.
Survivor benefits
When a Social Security recipient dies their surviving spouse may be eligible to receive survivor benefits based on the deceased spouse’s earnings record. Survivor benefits can be up to 100 percent of the deceased worker’s benefit amount. This is one reason why the higher earning spouse delaying their claim as long as possible can be beneficial for couples — it maximizes the survivor benefit available to the remaining spouse.
Taxes on Social Security benefits
Depending on your total income some or all of your Social Security benefits may be subject to federal income tax. Up to 85 percent of benefits may be taxable if your combined income — adjusted gross income plus nontaxable interest plus half of your Social Security benefits — exceeds certain thresholds. Some states also tax Social Security benefits though many do not.
How to estimate your benefit
The Social Security Administration provides several tools to help you estimate your retirement benefit:
- My Social Security account — create a free account at ssa.gov to view your earnings record and see personalized benefit estimates at different claiming ages
- Social Security Retirement Estimator — an online tool at ssa.gov that provides benefit estimates based on your actual earnings record
- Social Security Statement — mailed periodically to workers who are not yet receiving benefits and available online through your my Social Security account
Key terms to know
- Average indexed monthly earnings (AIME) — the inflation-adjusted average of your 35 highest earning years used to calculate your benefit
- Primary insurance amount — the monthly benefit you are entitled to at full retirement age
- Full retirement age — the age at which you receive your full Social Security retirement benefit
- Delayed retirement credit — the 8 percent annual increase in benefits for each year you delay claiming beyond full retirement age up to age 70
- Spousal benefit — a benefit available to a spouse based on their partner’s earnings record
- Survivor benefit — a benefit available to a surviving spouse based on the deceased spouse’s earnings record
- Combined income — a figure used to determine whether Social Security benefits are subject to federal income tax
Sources
- Social Security Administration — ssa.gov
- USA.gov — Social Security
- National Institute on Aging
This article is for general informational purposes only and does not constitute legal, financial, or medical advice. Social Security rules and benefit amounts are subject to change. Visit ssa.gov or contact the Social Security Administration directly for the most current information specific to your situation.