Having a clear idea of your potential Social Security benefit is essential for proper retirement planning. Since continuous monthly payments began in 1940, Social Security has been one of the most fundamental social programs in the United States. For some of its nearly 53.5 million retired beneficiaries, Social Security is merely supplemental income, but for a few it is a vital source of retirement income that keeps their basic needs covered.
Regardless of the role Social Security plays in your retirement finances, it’s important to have an idea of how much you’ll receive so you can start planning your retirement budget accordingly. If you’re a few years away from retirement, it can be difficult to achieve an exact estimate, but you can use averages at particular claim ages to get a close idea of what to expect.
How Social Security Calculates Your Monthly Benefit
Social Security calculates your monthly benefit using your average earnings over the 35 years when your earnings were highest.
It makes an adjustment to your earnings for inflation (called “indexation”) to reflect its value in today’s dollars and then divides the total number of months in those 35 years to get your average indexed monthly earnings (AIME), if not If you have 35 years of income, Social Security uses zeros for the missing years to calculate your average.
Social Security applies a formula that uses tipping points (which are adjusted annually) to determine your primary insurance amount (PIA), which is the monthly benefit you will receive if you apply for insurance at your full retirement age (FRA).
The formula involving tipping points can be a little complicated or confusing, so an easier way to determine your primary insurance amount is to validate your earnings record on the Social Security Administration site (SSA.gov) and use their online benefits calculator.
The role of your full retirement age in determining your benefit amount
The last part of deciding your monthly benefit amount is when you apply in relation to your full retirement age, which is based on birth years as follows:
Although the full retirement age for most Social Security newcomers is 67, you can start claiming benefits at age 62 (reducing the monthly benefit amount) or delay them until age 70 (increasing the benefits) your monthly benefits).
If you are within 36 months of your full retirement age, the Social Security Administration decreases your monthly payment by 5/9 of 1% for each month you make the early application, beyond 36 months, the program decreases your benefits by 5/12 of 1% each month, with a full retirement age of 67, someone claiming benefits at age 65 would enjoy their retirement payment but reduced by approximately 13.33%.
According to the latest data from the Social Security, the average monthly benefit for someone who files at age 65 is $1,505, which is equivalent to $18,060 annually.
It is also worth emphasizing that, based on the average lifetime earnings of men and women, the average benefit at age 65 may change; for men, the average benefit at age 65 is higher: $1,671; for women, it is $1,356 dollars.
