Social Security is arguably our nation's most important social program. Each month, more than 63 million people receive a benefit check, and approximately 44 million of them are retired workers. More than a third of these workers will be pulled out of poverty as a result of this guaranteed monthly stipend.
However, it's also a program that's shrouded in uncertainty. Perhaps the most prevailing issue among these workers is wondering what they'll get from Social Security when it's their time to retire. After all, it's anticipated that 84% of nonretirees will lean on the program in some capacity to make ends meet, according to an April 2018 Gallup survey, so knowing what you're going to be paid from Social Security is sort of important.
Four overlying factors that affect your Social Security payout
Before we dig into the nitty-gritty of what you'll be paid from Social Security, we first have to take a look at some of the most important variables that go into determining your monthly benefit at full retirement age (i.e., the age at which you become eligible for 100% of your monthly payout, as determined by your birth year). There are four factors that'll need to be considered.
The first and second factors are intertwined: your work history and earnings history. When determining your monthly benefit at full retirement age, the Social Security Administration (SSA) will take into account your 35 highest-earning, inflation-adjusted years. For each year less than 35 that you've worked, the SSA will average $0 into your average annual earnings, which can adversely impact your payout.
Third, it depends on your birth year. As noted, your birth year is what determines your full retirement age. Put simply, if you claim benefits at any point prior to reaching your full retirement age, you can expect to receive a permanent reduction in your monthly benefit. Conversely, if you wait until after your full retirement age to begin taking benefits, you can earn more than what you'd have received at full retirement age.
Fourth and finally, your claiming age matters. You can begin taking Social Security retired worker benefits at age 62 or any point thereafter. There is, however, an incentive to wait. For each year you hold off on taking your benefit, it'll grow by approximately 8%, up until age 70. Thus, all things being equal -- work history, earnings history, and birth year -- an individual claiming at age 70 could earn up to 76% more per month than the same individual taking benefits as soon as possible at age 62.
What will I be paid by Social Security?
Now that we've got the overlying factors out of the way, we can get down to the specifics: What will Social Security pay me when I retire?
Thankfully, Social Security doesn't pull your benefit out of thin air. Rather, it uses a benefit formula with values (known as bend points) that change annually, based on your first year of eligibility to claim benefits -- i.e., age 62 -- to determine your primary insurance amount (PIA). The first number you'll need to know is your average indexed monthly earnings, or AIME. This figure is determined by averaging your 35 highest-earning, inflation-adjusted years, then dividing by 12 to arrive at a monthly figure.
Once calculated, your AIME is then applied to Social Security's three-part formula, which looks like this in 2019 for folks born in 1957:
- 90% of the first $926 in AIME
- 32% of AIME greater than $926, but less than $5,583
- 15% of AIME greater than $5,583
As a reminder, you'll want to use the bend points that are applicable to your first year of Social Security eligibility and not the bend points above if you weren't born in 1957. Don't worry, the SSA takes cost-of-living adjustments into account if using bend points from a previous year.
For example, the Bureau of Labor Statistics reports that median annual personal income in 2016 was $31,099, or $2,592 a month (with some rounding). For the sake of simplicity, let's assume this is our fictitious retiree's AIME over 35 years and that they will begin taking benefits right at full retirement age (66 years and six months). Here's how the PIA formula works: 90% of $926 equals $833.40, plus 32% of ($2,592 minus $926) equals 533.12
Added together, this median income individual born in 1957 would receive $1,366.52 a month.
This may not sound like a lot, and it's not. Social Security benefits aren't going to make you a rich person by any means. According to the SSA, the program is only designed to replace about 40% of the average worker's earnings during retirement. Put in another context, this is the SSA's way of saying that Social Security isn't supposed to be your primary source of income during retirement.
If you're curious what your Social Security retirement benefit might be based on your current work and earnings history, consider creating a My Social Security account and checking your personalized estimates, complete with earnings history. Doing so is also a great time to review past tax returns and ensure that the SSA will be factoring in the right earning amounts when calculating your PIA.