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The Ultimate Guide To Calculating Social Security Benefits

Published June 1, 2021

7 minute read

Devon Taylor

By Devon Taylor

If you are like most Americans, you have been paying into Social Security your entire working life. It’s typically done through payroll or self-employment taxes. It’s possible that you (and your employer) have contributed hundreds of thousands of dollars over the decades. Now, as retirement creeps closer, you might be wondering how much of those contributions you can collect. It’s a natural question, one that many soon-to-be-retired folks ask themselves. This article will tell you everything you need to know about calculating social security payments, along with the factors that impact that calculation. As you’ll come to understand, you have a few choices to make.

When To Start Collecting Social Security?

Ultimately, the decision of when to begin collecting Social Security is up to you. You must decide at what age you want to begin receiving these benefits. Your age, working status, health, spending habits, and other savings will all factor into this decision. Simply put, you’ll get more money from Social Security if you wait to collect it.

In general, it’s best to wait and collect Social Security as late as possible. This will increase the monthly payments (which are adjusted for inflation each year). You should be aware that the American retirement system has traditionally been a “three-legged stool.” That means Social Security is just one part of your retirement income. Personal savings and pensions are the other two legs. Keep in mind that Social Security was never designed to be your sole source of retirement income.

While traditional pensions are slowly disappearing, more employers are moving towards 401(k) plans or Roth IRAs as a means of sponsored, tax deferred retirement savings. Whenever available, you should take advantage of these savings vehicles too.

Consider The Average Payment

The average Social Security benefit in 2021 is $1,543 per person, per month. The maximum benefit for someone who retires at the full retirement age is eligible to receive is $3,148 each month. However, a worker would need to earn the maximum taxable amount (currently $142,800) consistently over 35 years to qualify for the largest Social Security payment amount.

Does that sound like enough for you? There’s a good chance that it’s not, unless you live extremely frugally. It’s also unlikely that you are going to reach the very top benefit amount, unless you spent decades in a very high-paying position. Remember that if you elect to take these benefits before official retirement age (which varies slightly based on when you were born), they will be lower every month.

Calculate Your Social Security Payment

Social Security payments are calculated using the 35 highest earning years of your career. They are also helpfully adjusted for inflation. If you work for more than 35 years, your lowest earning years are dropped from the calculation. That results in a higher payment. On the other hand, if you worked for less than 35 years, you’ll have zeros averaged into your calculations. That means lower monthly payments.

There are plenty of simple Social Security calculators available online, including the official one at SSA.gov. If you want to be a little more exact, you can work out your Average Indexed Monthly Earnings (AIME) calculation and figure out how your benefits will “bend.” Placing all of these numbers into a simple Excel or Google Spreadsheets document will help you keep track of everything.

Consider Your Age and Health

As mentioned, the age at which you begin collecting Social Security plays a big factor in your monthly payment amounts. Your monthly benefit is reduced if you claim payments before your full retirement age, which is typically age 66 or 67. It depends on the year you were born. Either way, you can boost your monthly payments by not claiming Social Security until your full retirement age. After 70, though, they won’t increase any further. So make sure you’re receiving them by the time you hit the big seven-oh.

When considering which age you want to start collecting Social Security, other factors come into play. You should consider your overall health, lifestyle, and general well-being. For example, if you are getting too old/sick/weak to work, then you may decide to start collecting the benefits as soon as possible. You may decide that taking a lower amount per month is worth it, just to be able to stop working and focus more on your health. On the other hand, those of you in robust health in your mid-to-late 60s might benefit from waiting. You can even continue working, if you want, and not collect Social Security until you’re 70. 

Subtract Medicare Premiums

In addition to your physical health, you may also need to factor Medicare premiums into your Social Security calculations. Many retirees have their Medicare Part B premiums deducted from their Social Security checks. The standard Medicare Part B premium is $148.50 per month, as of 2021. That’s almost 10% of the average payment.

It’s worth noting that a Medicare Part B premium increase cannot exceed the annual Social Security cost-of-living adjustment. If you enroll in Medicare Part B, you should consider having the premiums deducted from your monthly Social Security payments.

Adjust For Inflation

Inflation is a big factor when it comes to Social Security benefits. The SSA uses a process called “wage indexing” to determine how to adjust your earnings history for inflation. Every year, they publish the national average wages for the year. Your wages are then indexed to the average wages for the year you turn age 60.

For each year, you take the average wages of your indexing year (which is the year you turn 60), then divide them by average wages for the year you are indexing. Finally, multiply your included earnings by the number you arrive at. Inflation and indexing calculators can be found on the official Social Security website of the U.S. government.

Remember Income Tax Withholding

Many retirees will have to pay income tax on their Social Security payments — especially if they have other sources of retirement income. (Which you really should have, by the way.) However, if Social Security is your only source of income, then you won’t have to pay taxes on it. Most people, though, will rely on additional sources of income after they retire.

Those extra retirement incomes (pensions, investments, 401(k) and IRA withdrawals, part-time work, etc) all factor in to your annual retirement income. If that number rises above basic income tax thresholds, you may also have to pay tax on your Social Security benefits. To avoid a large tax bill, you can choose to preemptively have your Social Security benefits taxed. You can ask the SSA to tax your benefits at 7%, 10%, 12% or 22% levels. If you end up calculating wrong, you’ll just owe more taxes when you file in the Spring (or receive a refund, if you overpaid).

Create a ‘MySocialSecurity’ Account

Anyone can get a personalized estimate of their future Social Security benefits at various ages. You just need to take the time to create a ‘My Social Security’ account at SSA.gov. These estimates are based on your actual earnings history, so they to be most accurate for those approaching retirement age. You just need some basic documentation to get started.

Estimates may change from year-to-year, especially if you experience a significant salary change or gaps in their earnings history. Overall, everyone expecting to receive Social Security some day should make an account. It’s the quickest and easiest way to see your earnings history, calculate future benefits, and ensure there are no mistakes in your financial history.

Mistakes to Avoid

We actually have a whole article about Social Security mistakes you should take care to avoid. While we obviously suggest you read the whole thing, there are certain retirement planning tactics that are better than others. For example, you might need to factor in spousal benefits. Or plan for the eventual death of yourself or your partner, and how that will impact your Social Security payments for the surviving partner.

Plenty of people actually forgot about Social Security altogether. They keep hearing news stories about the program being in financial trouble, so they assume they can’t count on it. While it’s true that you can’t rely on Social Security as your sole income source in retirement, fears that it will end up bankrupt are mostly unfounded. Congress isn’t likely to ever let the program fail, especially with hundreds of millions of Americans contributing their own money to it for decades. So even if you’re only set to receive a minimal monthly benefit, don’t neglect it. It’s your money, after all.

Learn More

As with all things financial, more knowledge is never a bad thing. When it comes to your retirement planning, it literally pays to make an effort in educating yourself. Learn about compound interest, 401(k) plans, and investing strategies. And of course, factor in your Social Security benefits as you etch out your preliminary retirement budget. No matter how much you’re eligible to receive from these benefits, any money is still better than none. So learn about the program and make sure you’re using it to your full advantage.

You can use a Social Security calculator, which are found all across the web. They will help your determine the best time to claim your benefits, based on your age, health, and overall financial situation. There is also a wealth of knowledge available on Social Security benefits (and how to calculate them) on the official Social Security website. You can also check out websites dedicated to seniors and retirees, including AARP and the Consumer Financial Protection Bureau.

The Bottom Line

Social Security benefits are a key part of most people’s retirement. So understanding how much you can expect to receive is very important. Knowing what you are owed from Social Security can help you to plan for a successful and long retirement. The SSA has all of the records, systems, and software required to perform these calculations for millions of Americans.

Remember that minimum benefits become locked in based on calculations made between the ages of 60 and 62. However, you can put off collecting Social Security benefits until age 70, should you remain in good health and continue working. To learn more, consult the various websites mentioned in this article. Come up with a plan that best suits your individual needs. Finally, enjoy the freedoms you’ve earned after a long working career!

Calculating social security

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Devon Taylor

Managing Editor

Devon is an experienced writer and a father of three young children. He's simultaneously trying to build college funds and plan for an eventual retirement. He's been in online publishing since 2013 and has a degree from the University of Guelph. In his free time, he loves fanatically following the Blue Jays and Toronto FC, camping with his family, and playing video games.

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