The Social Security Administration (SSA) is a vital agency in the United States that provides financial support to eligible retirees through Social Security benefits. This aspect of retirement planning is often misunderstood, leading to confusion. This article will help explain the main components for how SSA calculates benefits.
The first step is understanding Primary Insurance Amount (PIA). PIA refers to the monthly payment one can claim at their full retirement age, which varies depending on their birth year. The SSA’s formula for calculating the PIA uses bend points determined yearly and corresponding to changes in national average wages.
The PIA calculation consists of specific percentages and portions of an individual’s average indexed monthly earning (AIME). Up to 35 years of earnings are needed to compute AIME. Here’s how it is calculated:
- Select the years with the highest indexed earnings
- Add up the indexed earnings for those years
- Divide the total by 420 (the # of months in 35 years)
- Round the result down to the nearest dollar
Bend points are dollar amounts in the formula used to calculate the PIA that change annually with the national average wage index. The name comes from the shape of the graph created when plotting Social Security benefits against average indexed earnings, which shows two points where the line bends.
It’s also crucial to know that the age at which you start collecting Social Security benefits impacts the monthly benefits you receive for the rest of your life. If you start receiving your benefits before your full retirement age, your benefits may be lower. On the contrary, delaying benefits past full retirement age can increase your benefits due to the Delayed Retirement Credits you acquire.
Social Security benefits credits play a crucial role in benefit calculations. You earn these credits when you work and pay social security taxes. Up to four such credits can be earned each year, which are instrumental in determining your eligibility start date for retirement benefits.
Another element affecting monthly benefits is the Cost of Living Adjustment (COLA), which SSA uses to ensure that the purchasing power keeps pace with inflation. COLA is determined by the rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third of one year to the corresponding period of the next. If there is a measured increase, the monthly benefits in December of the following year receive a monthly increase.
Planning for retirement income can be complex and understanding how your Social Security benefits are calculated is fundamental to this process. Factors such as PIA, AIME, bend points, retirement age, social security credits, and COLA contribute to your eventual benefits.
While this article is intended to provide an overview of how Social Security benefits are calculated, speaking with a financial professional or directly with SSA is essential to understand how these calculations impact your situation. Contact Brightside Financial today to schedule your no cost consultation. Being well informed about your benefits and preparing for your eventual retirement is key for a successful retirement.
SWG3742682-0724d This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives. The sources used to prepare this material are believed to be true, accurate and reliable, but are not guaranteed. The information provided in this blog is for informational purposes only and should not be considered official guidance or advice from the Social Security Administration (SSA). While we strive to provide accurate and up-to-date information, we are not affiliated with the SSA and the content provided here may not always reflect most up to date policies or regulations of the SSA. Therefore, readers are encouraged to verify any information provided here with official sources or consult with a qualified professional for personalized guidance regarding Social Security matters.
