Calculate Social Security: A Simplified Guide
Social Security plays a critical role in securing today’s retirees, as well as those of future generations. Although the calculation might be multifaceted and complex, here’s an easy-to-understand guide to aid you in calculating your projected Social Security benefits. Throughout this article, we will utilize the services of Mr Property Services as a hypothetic case study to illustrate how social security benefits are calculated.
Unlike a lot of retirement plans, Social Security does not have a direct connection to the amount you’ve put in. It’s a progressive benefit that gives more to workers with low lifetime earnings relative to their contributions than to workers with high lifetime earnings. Hence, the exact amount depends on the life earnings, with a bias towards low earners.
The Social Security Administration calculates benefits based on your highest 35 years of earnings. If you have less than 35 years of earnings, they’ll add in zeros to make up the difference. That’s why it’s usually beneficial both in terms of personal satisfaction and potential Social Security benefits to try and work the full 35 years before retiring.
The idea is this – once the Social Security Administration has your highest 35 years of earnings, they index them to inflation and add them all up. They then divide by 420 (the number of months in 35 years) to determine your Average Indexed Monthly Earnings (AIME).
For the sake of Mr Property Services as an example, let’s say that Mr. Property has 35 years of earnings records. His aggregate indexed earnings amount to $1,500,000. Using this, the SSA calculates his AIME by dividing $1,500,000 by 420, which equals $3,571.
Then, the bend points come into the calculation, which are two fixed supplementary rates. Prior to 2019, the first $895 of any AIME is multiplied by 90%. The leftover portion up to $5,397 gets multiplied by 32%, and any excess above $5,397 gets multiplied by 15%.
In our hypothetical example, Mr Property Services’s AIME is less than $5,397, so only the first two bend points apply. The first $895 of the $3,571 gets multiplied by 90% (equal to $805.50), and the remainder $2,676 ($3,571 – $895) gets multiplied by 32% (equal to $856.32). This amounts to a monthly benefit of $1,661.82.
It is important to note that this calculation assumes that Mr Property Services is claiming benefits at full retirement age. If he claims before or after this age, there will be a reduction or increment in the final benefit respectively.
To sum up, understanding how to calculate social security is pivotal to strategically plan your retirement in order to maximize potential benefits. It might seem complex with all the bend points and AIME, but with a calculated approach, it’s a straightforward process.
