Most people know the basics about Social Security -- for example, it's common knowledge that once you reach a certain age, you can collect a monthly Social Security check for the rest of your life. However, the procedure that determines the amounts of those checks isn't well understood by most people. Here's how the Social Security Administration calculates your benefits, and how you can get an idea of what yours will be.

More complicated than most pension plans
Unlike most pension plans, which are based on the last few years of salary, Social Security is based on your 35 highest-earning years. Your earnings for those years (up to the Social Security wage cap) are indexed for inflation, and then averaged.

Social Security card in between tax forms, with eyeglasses and a $20 bill on top

Image source: Getty Images.

For example, here's a portion of the worksheet provided by the Social Security Administration (SSA) that those who turn 62 in 2016 can use to estimate their benefit. Notice the maximum amount of Social Security wages for each year, as well as the inflation factor listed for each year. For example, you would take your earnings for 2005 (up to $90,000) and multiply the amount by 1.26 when calculating your benefit.

Source: SSA.

Once your 35-year average is calculated, a formula is applied to determine the amount of your benefit assuming that you work until normal retirement age (66-67, depending on your year of birth). Based on the calculated average, your monthly full retirement benefit is:

  • 90% of the first $856 in average monthly earnings.
  • 32% of the amount over $856 and less than or equal to $5,157.
  • 10% of the amount over $5,157.

For example, if you calculate your average monthly income to be $4,000, you would multiply $856 by 0.9, and the other $3,144 by 0.32. This would work out to a monthly Social Security benefit of $1,776.48.

What if I retire early or late?
You can choose to file for Social Security as early as age 62, or as late as age 70. Filing early will reduce your benefit by 6.67% per year for up to three years before your normal retirement age, and an additional 5% per year beyond that.

On the other hand, if you choose to wait, your benefit amount will increase by 8% per year until you begin collecting. To illustrate this point, let's say that your calculated retirement benefit at your normal retirement age is $1,500 and that you were born after 1960, making your retirement age 67. Here's the effect of retiring earlier or later:

If You Retire at ...

You'll Get This Percentage of Your Normal Retirement Benefit

So a $1,500 Monthly Benefit at Full Retirement Age Becomes ...




























It's impossible to know for sure, but you can get a good estimate
If you're years away from retirement, it's impossible to know for sure how much your Social Security benefit will be. As we've seen, it takes the highest 35 years of your working lifetime into account, and there's no way of knowing which 35 those will be until you're done working.

Fortunately, the SSA can give you an estimate based on the information in your work record. In fact, by creating an account at, you can download your Social Security statements, which contain information on your eligibility and estimated benefits for all of Social Security's programs. Keep in mind that these estimates make certain assumptions, such as no drastic changes in your salary between now and retirement, but if you're in a stable career it should be pretty close.

Source: SSA.

Will Social Security change before I retire?
If you're young (under 50), there's another factor to be aware of. As I've written before, Social Security is not sustainable in its current form. Specifically, the Social Security trust funds are paying out more than they're taking in, and some action will need to be taken to fix this problem.

While across-the-board benefit cuts are extremely unpopular, benefit cuts for higher-income individuals are a real possibility. Or the normal retirement age could increase further, to 68 or even 70. The point is that while I believe something will be done and Social Security will still be there when you retire even if you're a teenager now, there are likely to be several changes to the program between now and then that will affect your benefit, or the Social Security taxes you'll pay.