This Is What You Need To Know About Social Security Benefits

Today I’m going to help you answer your questions about Social Security benefits.

Many of our clients nearing retirement age ask us…

• Where do I go to see my Social Security earnings statement?
• When should I start taking benefits?
• How much money can I expect to receive?

Maybe you’ve had some of the same questions.

If so, this post is meant to teach you how Social Security benefits work, and where you can go to get answers.

Let’s get started.

Table of Contents

Use the following links to jump ahead to that section of the post.

• How do I qualify for Social Security benefits?
• What happened to my Social Security statements?
• How to create a My Social Security account online
• How to view and download your Earnings Statement
• How much money will I get from Social Security when I retire?
• How to estimate your retirement benefits
• How is Social Security Calculated?
• Did I miss anything?

How do I qualify for Social Security benefits?

Anyone who is 62 years old and has accumulated 40 credits (10 years of work) is qualified to receive Social Security benefits.

Credits are awarded to everyone who works and pays into Social Security taxes. In 2019, you earn one credit for every $1,360 of earned income. But you can only earn four credits per year.

You can see your earnings history and how many credits you’ve accumulated on your Social Security Earnings Statement.

What happened to my Social Security Earnings Statement?

Social Security used to mail annual paper statements. But that changed in 2017.

In response to budget constraints, Social Security limited who will receive paper statements. They are now only sent to people aged 60 and over, who are not getting benefits and don’t have a My Social Security account.

So unless you fall into this narrow category, you must create a My Social Security account online to view and download your earnings statement.

How to create a My Social Security account online

For a government website, I was impressed by how fast and easy it was to set up a My Social Security account.

All you need is an email address.

Then follow these simple steps.

Select “Create an Account”

Visit https://www.ssa.gov/myaccount/ and click “Create an Account.”

Then select “Create New Account.”

Provide some personal information to verify your identity

After you agree to the Terms of Service you will be prompted to fill out your basic contact information.

Then on the next page, you’ll be prompted to answer some questions about yourself to verify your identity.

These questions are designed so that only you should know the answer. If someone stole your wallet, he or she should not be able to answer these questions.

Choose a username and password

Next, you’ll have the option to receive a security code via text message or email. This security code will be used each time you sign in.

Finally, set up a username, password, and security questions. Once you’ve done all that, you’re done!

Going forward

Now that you have created an online account, Social Security will email you a reminder approximately three months before your birthday to review your Earnings Statement online.

But why wait?!

With your My Social Security account you can login and download a copy of your statement anytime you’d like.

Let me show you how.

How to view and download your Earnings Statement

Your Earnings Statement is used to estimate your expected Social Security benefits when you retire. This information is available inside of your My Social Security account.

All you have to do is follow these three steps.

Step 1: Visit My Social Security login page and sign in

Step 2: Click on Earnings Record

Step 3: Print, save or download your statement data

Now that you know where to get the information you need, it’s time to turn our attention to the big question…

How much money will I get from Social Security when I retire?

That’s a complicated question, so the best I can do right now is to say, “It depends…”

It depends mostly on three things:

1. How much money you earned over your lifetime
2. When you choose to start receiving benefits
3. Inflation

Lifetime Earned Income

Higher lifetime earnings will result in higher Social Security benefits. Your benefits are based on the highest 35 years of earned income throughout your career.

For this reason, some people may find it advantageous to delay their benefits if they continue to earn a high salary beyond age 62.

Timing of Benefits

Everyone who accumulates 40 credits throughout their career will become eligible to take Social Security benefits as early as age 62. However, if you choose to receive benefits before your full retirement age then your benefit amount will be penalized.

On the flip-side, if you postpone your Social Security benefits beyond your full retirement age, then you receive additional credits.

Social Security defines “full retirement age” based on the year you were born.

Year of birth	Full retirement age
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 or later	67

For 2019, if your birth year is 1952 or earlier, then you have reached full retirement age and are already eligible for your full Social Security benefit.

Inflation

Inflation is always taken into consideration when calculating Social Security benefits. Failing to do so is often why people will make poor estimates of their future distributions.

Due to inflation, it’s really impossible to calculate your Social Security benefits exactly until you reach age 62.

But you can still make a pretty good estimate, and there are tools available to help you out.

How to estimate your retirement benefits

Social Security has a handy online calculator that provides immediate retirement benefit estimates to help you plan for your retirement.

It’s especially useful for creating “what if” scenarios. For example, the calculator will help you estimate changes to your benefits based on your “stop work” dates or expected future earnings.

To use the Retirement Estimator, just follow this link: https://www.ssa.gov/benefits/retirement/estimator.html

How is Social Security Calculated?

If you’re itching to learn more about how Social Security benefits work (and let’s admit it, who isn’t?!) then the rest of this post is for you.

We took the time to get down and dirty with Social Security benefits so that we could explain it to you in a way that makes sense.

Sure, the Retirement Benefits Estimator is a nice tool. But if you really want to understand what factors play into your benefit amount, then you need to dive into the particulars.

Calculating your Social Security benefits is a bit tedious, but I promise that it doesn’t involve any complex math and it’ll all make sense in the end. All you have to do is follow these three steps:

1. Use your earnings history to calculate your Average Indexed Monthly Earnings (AIME)
2. Use your AIME to calculate your Primary Insurance Amount (PIA)
3. Adjust your PIA based on the age you begin taking benefits

To help us out, I created this Google Sheet. Clicking the link will bring you to a view-only version of the spreadsheet. Make yourself a copy so you can edit the cells and see how the formulas work for yourself.

I think you’ll find it to be a helpful tool as you follow along.

So let’s jump right in…

Step 1: Calculate your Average Indexed Monthly Earnings (AIME)

Average Indexed Monthly Earnings (AIME) is nothing more than a fancy way to say, “How much money did I earn in an average month during my entire career?”

This is the baseline from which your final Social Security benefits will be calculated from. Higher is obviously better. But as we’ll see in a moment, Social Security puts a cap on how much of your earnings can be used in your benefits calculation.

1. Start with a list of your earnings for each year

For that, you’ll need to download your Earnings Statement (Go back to the previous section if you need help).

In our sample spreadsheet, we are calculating the Social Security benefits of someone who was born in 1957, began work at age 22, and retired in 2019. Their nominal earnings for each year are recorded in Column C.

Feel free to change these numbers to what’s found on your Earnings Statement.

2. Adjust each year’s earnings for inflation

Social Security uses a process called wage indexing to adjust your earnings history for inflation. It’s a simple two-part calculation that uses the National Average Wage Index Table. This table, maintained by the Social Security Administration, is nothing more than a list of average wages earned for each year. 

We copied the National Average Wage Index Table into Column D of our spreadsheet.

The first step is to calculate a ratio, called the “indexing factor,” for each year. To do so, simply divide the average wage in the year that the person turns 60 by the average wage of the given year. 

In our example, this would mean that we divide 50,321 (the average wage when they turned 62) by the average wage in every other year. In 1993, our index factor will equal 2.1754 (50,321/23,132).

The index factor for each year is automatically calculated in Column E of our spreadsheet.

Finally, once you’ve calculated your indexing factor, simply multiply your earnings for that year by the indexing factor to adjust for inflation. The result is your indexed wages, seen in Column F of our spreadsheet.

3. Use your highest 35 years of indexed earnings to calculate a monthly average

Your Average Indexed Monthly Earnings is calculated from the sum of your highest 35 years of indexed earnings.

So, as I previously mentioned, higher lifetime earnings result in higher benefits. 

But there’s a limit.

Yearly earnings that exceed the threshold for Social Security taxes are not included in the AIME calculation. In other words, money that is not taxed by Social Security when it’s earned will not be eligible as a Social Security benefit later.

These threshold limits are adjusted for inflation every year and they’re documented in the Contribution and Benefit Base.

When figuring your top 35 earnings by year, you cannot include any amount over the contribution ceiling. In our example, nominal wages were higher than the max-allowable in the years 2009-2013. We highlighted those years purple.

Column G in our spreadsheet shows the Social Security wage thresholds for each year.

The formula in Column H considers this contribution ceiling and calculates your max allowable earnings for each year.

Once this is done, we can finally calculate AIME by totaling our highest 35 years of indexed earnings and dividing by 420 (which is the number of months in a 35-year work history).

In our example, the AIME is $6,204.

Step 2: Calculate your Primary Insurance Amount (PIA)

Your Primary Insurance Amount (PIA) is the amount you would expect to receive from your Social Security if you began taking your benefit at your full retirement age and you did not adjust for changes in the cost of living.

Going from AIME to PIA requires a formula based on “bend points.”

Social Security Bend Points

Bend points are simply the thresholds that determine what percentage of your AIME is calculated into your PIA. The formula is designed this way so that low-income earners receive a higher proportion of their income replaced by Social Security than high-income earners.

In other words, if you make more money, you will receive more social security benefits, but the proportion of those benefits to what you earned diminishes.

It’s like the inverse of the tax bracket system. For income tax, your tax bracket increases when you earn more money. For social security benefits, your PIA decreases when you have higher AIME.

The threshold amounts, or “bend points,” used to calculate your PIA are taken from the year you turn 62. This is important because Social Security adjusts the bend points each year for inflation.

You can see the current bend point formula here.

Regardless of what the bend points are, the multipliers for each bucket remain the same:

• 90% on the first portion
• 32% on the second
• 15% of the third

The total PIA in our example then is = $2,416.

Note: Since bend points are adjusted each year for inflation, any PIA calculation for people who are not 62 years old by 2020 must be estimated. In our Google Sheet example, we have forecasted bend points for future years using a 3% inflation adjustment.

Can my PIA change after I reach age 62?

Yes, there are two reasons why your PIA may change after you reach 62.

1. Retirement Age – You do not apply for benefits, and keep working between the ages of 62 and 70. If in one of those years you earn more than one of your previous 35 highest-earning years, then your AIME will increase, as well as your PIA.
2. Inflation – Your PIA will be adjusted in the future to keep up with the Cost of Living Adjustment. Note that this is not the same adjustment used to calculate your indexed wages. You can see historical Cost of Living Adjustments here.

These two factors will be explained in the final step below.

Step 3: How your benefits “start date” affects your PIA

The last step in calculating your final Social Security benefits is factoring in when you elect to start taking them. Everyone who meets the 40 credit requirements and is 62 years old can begin receiving their Social Security benefits.

However, you will be penalized with a reduction if you choose to start taking your Social Security benefits before you reach your full retirement age.

On the other hand, if you defer your benefits past your full retirement age, then you will receive an additional credit.

There is yet another formula for each which I’ll detail below:

Reduction Formula

• 5/9 of 1%: Your benefits are reduced by 5/9 of 1% per month for the first 36 months prior to reaching your full retirement age.
• 5/12 of 1%: In addition to the reduction above, your benefits will be further reduced by 5/12 of 1% for each month that exceeds 36 months.

Example:

If I begin taking Social Security benefits at age 63 and 6 months, and my full retirement age is 67, then I will incur 42 months of penalized reduction. The first 6 months will incur 5/12 of 1% penalty, and the remaining 36 months leading up to my 67th birthday will incur the 5/9 of 1% penalty. My cumulative reduction will equal 22.5%.

Someone who begins taking Social Security benefits as soon as they are able (age 62) and has a full retirement age of 67 will incur a maximum penalty of 30% reduction off their PIA.

Credit Formula

• 2/3 of 1%: If you were born in 1943 or later, your benefits will increase by 2/3 of 1% per month (8% per year) for each month that you are past your full retirement age when you begin benefits. 

Example:

If I delay my social security benefits to the maximum age of 70, and my full retirement age is 67, then I will have increased my PIA by 24%.

How inflation affects your PIA

Your PIA is calculated when you reach age 62. But for every year that you postpone receiving your benefits, Social Security will apply a Cost of Living Adjustment (COLA).

You can view the historical COLA adjustment rates here. This rate has historically be based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The COLA adjustments are why most people are better off waiting to take their Social Security benefits beyond their full retirement age than to take it early.

Did I miss anything?

Social Security benefits is a complex topic with plenty of details and exceptions that I had to leave out of this short post.

So if you’re looking for even more information right now, I would direct you to Social Security expert, Vonda VanTil, who has resources (like this video conversation) where you can learn about what decisions will impact your retirement benefits.

But in the meantime, I’d like to hear from you.

What other questions do you have about your Social Security benefits?

Or maybe you would like me to clarify something I already mentioned.

Either way, let me know by leaving a comment below.