According to a report by the Insured Retirement Institute, a majority of baby boomer are either underprepared or worse unprepared for their retirement – means they have nothing to fall back on for retirement. This is where the Social Security comes in.
Social Security Program is very important for the US senior citizens. From contributing 1/3rd of their totalincome to making a difference between a comfortable and incredible life, social security makes up even 50% of the total income of its beneficiaries.
For those who have little to no retirement savings, the social security program may be the only way to a financially secure life-after-retirement. Even if you do have a solid ground, the extra money from your social security claims may make a huge difference in your life.
With that said, many people are confused how social security benefits are actually calculated? For many people, the average social security check ranges anywhere between $1400 to $1500, $1461 to be precise. But the exact amount of your check will largely depend on your social security tax deposits, the time of your filing of claims and your application or disability. However, it is beneficial if you calculate how much you'll be receiving to choose the best time for filing your social security claims, because that can make a major impact on how much you'll receive ultimately.
Determining your social security benefit amount
Determining the exact amount of receivable benefits comes from a complex formula, but here's the good news – you don't have to run to grab your calculators to do that. Before we dive into the how to, the first step should be to determine if you qualify for the social security at all.
The next step is the easiest – you can log on to mysocialsecurity to create an account and receive estimated amount of receivable benefits automatically. The data you enter must be genuine so you receive the best estimations. You can use this to check your statements quickly and easily online These statements report your earnings for the year, as well as the social security benefit's estimated amounts based on those earnings.While it takes only a few minutes to complete the procedure, only 43% of the people who have accounts on mysocialsecurity have actually used their accounts to receive estimated calculations, according to the SSA.
How does it work?
After creating the account, you have to list all of your earnings ever earned through any kind of short-term or long-term job, freelancing, internships, business or entrepreneurship.Adjusting all of your work year's earnings for inflation
This amount should be listed in accordance with the maximum taxable earnings for each year. This information along with your eligibility status is shown on your Social Security statement.
For example, in 2015 the maximum amount of taxable earnings was subject to a payroll tax of $118,500. Hence, the amount you list in the respective year's earnings would either be that year's maximum taxable earning or your actual income earned for that year – whichever is lower.
After you list all of your incomes, you will then have to index all of your earnings to that years inflation brackets. The Social Security Administration publishes a list of indexes that contain each year's index factors with respect to that years' maximum taxable earnings. Let's say you earned a total of $55,000 in 1996 and the index factor of that year is listed as 1.97, so you'll have to multiply your income for that year by its index factor to reach at $1,08,350 in inflation-indexed earnings. You would have to repeat this process for each year you earned an income.Finding the 35-highest inflation-adjusted years
After indexing all of your work year's earnings, your next step would be to find and mark the 35 highest inflation adjusted earnings.
This is because the Social Security formula takes into account only the 35 years of your work years – earnings which you earned the highest (adjusted by the index factors). If you earned for less than 35 years, say only 31 years, then your inflation-earning list will contain all of your work-year's earnings would have to be listed for those 31 year's inflation-adjusted earnings and entries of four '0s'.Calculating your average indexed monthly earnings, AIME
The next step is to calculate your average indexed monthly earnings, or AIME, which is the gist of your social security benefits amount.
To calculate this, add up all 35 of your highest inflation-indexed income figures and then divide the total by 35 to get your annual average. Divide again by 12 to arrive at your AIME.Determining your Primary Insurance Amount, PIA
Once you have determined your AIME, it can be plugged into a formula to determine your base retirement benefit. This is also known as your primary insurance amount, or PIA. As of 2019, PIA is calculated by adding up the following:
- Ø90% of the first $926 of AIME
- Ø32% of AIME above $926 and less than or equal to $5,583
- Ø15% of AIME greater than $5,583
Adding up all of the above amounts will be your PIA.
There's a catch here: Your PIA is calculated using the benefit formula that was in effect during the year when your first became eligible for Social Security, not the formula in effect when you actually claim your benefit. In other words, the SSA will use the formula that was in effect when you turned 62, even if you wait until much later to start collecting your retirement benefit.
To be clear, you consider all of your earnings when calculating your average indexed monthly earnings, including any income you earned after you turned 62. However, you'll still use the formula in effect when you were 62, even if you work for several more years.
The good news is that the structure of the formula stays the same each year, meaning that the 90%, 32%, and 15% multiplying factors don't change. Only the income thresholds, also known as "bend points," change from year to year (they're $926 and $5,583 in the 2019 formula). If you're trying to determine your Social Security benefit and you turned 62 before 2019, you can find historical bend points on the SSA's website.Adjusting for your claiming age
The last step in getting the best out of social security is to determine the best time for claiming your benefits. This is the age at which you would be entitled to claim your full calculated Social Security benefit, and it's often referred to as the age at which you'd be taking Social Security "on time." However, Americans can choose to claim at any point between age 62 and age 70, and the majority don't claim benefits at their full retirement age. In fact, the most common Social Security claiming age is 62 -- the earliest age possible.
Choosing to claim your benefits early would result in some amount reduced or withheld by the SSA. Contact us to learn how to determine the best time to claim your benefits.