Wondering how much money you can expect from Social Security when you retire? Your Social Security benefit depends heavily on your earned income. For the most part, the more you earn, the higher your benefits. Within that general framework, there are a few key rules:
- Only your highest-paid 35 years of work get considered in calculating your benefit levels. Work fewer than 35 years, and your record will include years of zero earnings. Work more than 35 years, and your lowest-paid years drop off the record.
- Social Security uses an indexing formula that compares your income for a year to that year's average in order to better compare your earnings in one year to your earnings in other years. Your indexed earnings -- not your actual earnings -- go into figuring out your benefit amount. After you reach age 60, the indexing stops, and only your actual earnings are included.
- There's a limit on the amount of your annual earnings that Social Security will consider when calculating your benefits. That limit gets adjusted each year based on changes in the National Average Wage Index, and for 2014, it's set at $117,000.
Put that all together, and you get your "AIME"
After applying the indexing formula to your eligible earnings for each year, Social Security adds up your highest 35 years of covered indexed income and then divides that total by 420 (that's 12 months per year for 35 years). That number represents your Average Indexed Monthly Earnings.
Social Security then puts your AIME into a formula with two "bend points" to determine your Primary Insurance Amount, or PIA -- the amount you would receive if you retired at your full retirement age. For 2014, the formula looks like this:
- 90% of your first $816 in AIME, plus
- 32% of your AIME above $816 and up to $4,917, plus
- 15% of your AIME above $4,917
If you're reaching full retirement age in 2014, the maximum you'd be able to receive based on that formula is $2,642 per month. The total curve for determining your PIA if you reach full retirement age in 2014 looks like the chart below:
Age counts, too
Once Social Security has calculated your Primary Insurance Amount, it adjusts your actual benefit by comparing your age when you start collecting to your full retirement age. Generally speaking, you can start collecting anytime between age 62 and 70, and the later in that window you start collecting, the higher your benefit amount. The chart below shows the changes to your Social Security benefit based on your birth year and when you start collecting.
Make an informed choice
When it comes to your monthly Social Security retirement benefit, the three factors at least somewhat within your control that matter the most are:
- Your covered earnings each year
- The number of years you've worked (up to 35)
- The age you start collecting
If you're plan for Social Security to provide a significant portion of your retirement income, you now know how those factors work together to determine your benefit amount. With that information, you can better estimate what you'll get when it's time to collect and understand what you can still influence if you want your benefit to be more than you're currently on track to receive.