Social Security benefits play a crucial role in providing financial stability for retirees. As you get closer to this next step in life, you may wonder: how is Social Security calculated? It’s good to have a sense of how benefits are calculated to make informed decisions about your finances and maximize your benefits.
5 Factors That Go Into Social Security Calculation
The Social Security Administration (SSA) uses a comprehensive formula to determine your Social Security benefit amount based on:
1. Earning Years
The SSA considers your earning history over a span of 35 years to determine your benefit amount. These earning years are essential because they form the basis for calculating the Average Indexed Monthly Earnings (AIME).
2. Filing Age
Everyone has a full retirement age (FRA) assigned by the SSA at which they’re eligible to receive full retirement benefits. Generally, it falls around 65 to 67, but it depends on your birth year.
The timing of your claim can greatly impact the amount you receive. Claiming them before your FRA can reduce your benefits, and claiming them after can increase your benefits. This is capped when you reach 70.
3. Average Indexed Monthly Earnings
AIME is calculated by the income earned during your 35-year earning period. It’s adjusted for inflation to ensure fairness and to reflect the changing value of money over time. It also serves as the foundation for calculating the Primary Insurance Amount.
4. Primary Insurance Amount
PIA represents the amount you’re entitled to receive at your FRA. This policy is progressive, meaning it replaces a larger portion of a low-wage earner’s pre-retirement income than those who earn higher wages.
5. Cost of Living Adjustments
COLAs help ensure that benefits keep pace with inflation, protecting beneficiaries’ purchasing power over time. These adjustments are based on changes from an index that measures inflation, called the Consumer Price Index. When it increases, a COLA is added to Social Security benefits to ensure benefit recipients receive a corresponding increase.
Should You Use Social Security Planning Services?
Deciding when to take your Social Security benefits and choosing how to use them are two complex decisions that can greatly impact your financial future. There are also various rules and regulations by the SSA, which can be difficult to navigate without proper knowledge and guidance.
To help ease the process, it’s best to work with a professional. Social Security planning services offer valuable insights into claiming strategies, spousal benefits, survivor benefits, and more. Royal Oak has a team of financial advisors ready to assist you with all of your Social Security planning needs. Reach out to our team today to learn more about how we can help you!
