For anyone born after 1960, the Social Security Administration (SSA) determines that your normal retirement age, which is when you would be entitled to your full benefit, is 67.
But deciding whether or not you should retire at that age can be difficult. You can start receiving Social Security benefits as soon as you turn 62, but claiming early can significantly reduce your amount.
You can also wait until 70 to start taking Social Security (increasing your benefit to the highest amount possible), but perhaps you don’t want to wait that long. It depends on where you are in life from a financial perspective and how your health is doing.
Given all of these factors, it’s a good idea to figure out how much you might get when you start to claim benefits. Despite its complexity, you can break down the Social Security formula into basic parts to calculate your amount. Let’s see how much you would make if you earned about $100,000 annually (adjusted) over your career and retired at 67.
Breaking down the formula
To begin calculating your benefits, the SSA first calculates your average indexed monthly earnings (AIME), which looks at the 35 years of your work history in which you made the most money.
It looks at your nominal earnings over these 35 years and then indexes them (or adjusts them) to determine what the amounts would have been if you were making them in the present. So, essentially, the SSA would take your nominal earnings, from, say, 1982 and adjust them for wage inflation over the years to reflect what those earnings would be in 2022.
An example on the SSA website shows that nominal earnings of $13,587 in 1982 would have been equivalent to about $52,000 in 2022. But the SSA also has a wage base limit for what a retiree can get credit for. That number is $147,000 in 2022.
To finish getting the AIME, you add up your highest 35 years of annual earnings, which are now indexed to account for inflation. Then you divide by 35 to get the annual amount over that period and then divide by 12 to get the monthly amount.
Once you have your AIME, the next thing you need to do is calculate your primary insurance amount (PIA), which is your actual monthly benefit from Social Security for those receiving full benefits at the normal retirement age.
This is also not a simple calculation, but it can be done easily enough using these three steps and adding the amounts from each step. Here are the numbers for someone who turned 62 in 2022:
- 90% of the first $1,024 of your AIME.
- 32% of any amount between $1,024 and $6,172.
- 15% of the leftover amount above $6,172.
What is your PIA on an annual income of $100,000?
If your highest 35 years of indexed earnings averaged out to $100,000, your AIME would be roughly $8,333.
- 90% of $1,024 = $921.6
- 32% of $5,148 = $1,647.36
- 15% of $2,161 ($8,333-$6,172) = $324.15
If you add all three of these numbers together, you would arrive at a PIA of $2,893.11, which equates to about $34,717.32 of Social Security benefits per year at full retirement age. That’s not too shabby considering the maximum benefit is $4,194 per month, and that assumes you delay claiming until you are 70.
The $18,984 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.