If you're on the verge of retirement, one of the questions you're likely to ask is: How much Social Security will I get? The answer is relatively straightforward and depends on two factors: your lifetime earnings and the age at which you start collecting your benefits.
1. Calculating your primary insurance amount
At its core, the size of your monthly benefits depends on how much you paid into the system during your working life. The more you paid, the more you'll get back in retirement.
The amount your entitled to revolves around your primary insurance number. This is how much you'll receive each month if you wait until reaching full retirement before applying for benefits. At present, this threshold is age 66, though it's set to steady increase in the future to offset the impact on the Social Security system of longer lifespans.
To calculate the primary insurance amount, the Social Security Administration computes a person's average indexed monthly earnings over their 35 highest-earning years. That's a mouthful, so let's unpack it.
First, the SSA takes how much you earned each year during your career and then adjusts each year's earnings to account of inflation. It then identifies the 35 years with the highest inflation-adjusted earnings and then takes the average of those numbers. Finally, the SSA divides the average by 12, to translate it from average annual earnings to average monthly earnings.
Using this formula, a person can get up to $2,663 per month in Social Security benefits by waiting until reaching full retirement before electing to receive them -- this cap reflects in part the fact that Social Security taxes are assessed only against the first $118,500 of taxable income in 2015.
If this sounds complicated, rest assured that you won't have to go through the process of figuring all of this out on your own. Instead of grabbing your calculator, all you need to do is set up an account on the SSA's website. From there, you can see the running tally of your earnings and estimated primary insurance amount.
2. Translating your primary insurance amount into actual benefits
While determining your primary insurance amount is the most difficult part of the process, it still gets you only about halfway toward figuring out how much you'll receive in benefits, because the size of your monthly check is also a function of when you decide to receive them.
As you probably know, eligible Social Security beneficiaries have an eight-year window in which to begin receiving benefits. You can apply as soon as turning 62, or you can wait until turning 70 before electing to receive them.
What's important to keep in mind, however, is that not all retirement ages are created equal. The pivot point is your full retirement age, at which you're entitled to the entirety of your primary insurance amount.
If you apply before that point, then your monthly benefits will be smaller to offset the fact that you'll be receiving them for longer. And if you apply after that point, your benefits will be bigger than your primary insurance amount. Here's a look at the impact of your retirement age on the size of your benefits:
The point, in turn, is to decide what matters to you the most. If bigger monthly benefits matter, then you should wait as long as possible before applying. But if retiring early is a bigger priority, and you're not able to do so without the assistance of your Social Security benefits, then you should go ahead and do so earlier.
Either way, at least according to the SSA, the amount of lifetime benefits you receive should be about the same regardless of the age at which you retire. As the government agency explains in its helpful pamphlet, When to Start Receiving Retirement Benefits:
If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70, or any age in between. However, monthly benefit amounts can differ substantially based on your retirement age. Basically, you can get lower monthly payments for a longer period of time or higher monthly payments over a shorter period of time.
In short, while the size of your monthly benefits depends on when you decide to start receiving them, it's a highly personal question that only you can answer. Experts will advise you to wait. Family members may push you to take them early. But you're the one who can and should make the ultimate decision.
