How Social Security Benefits are Calculated
When you are planning for retirement, it's crucial to understand Social Security as a component in your income streams. Knowing what your Social Security income will be can prepare you for your financial future and strategize how to bridge the gap between that income and your anticipated retirement expenses. So, let's focus on how the Social Security Administration (SSA) calculates this benefit.
Social Security calculates your benefits based on your lifetime earnings, adjusted to account for changes in average wages over time. This helps ensure your benefits reflect today’s cost of living, not what wages were decades ago.
The Social Security Administration (SSA) then identifies the 35 years in which the worker had the highest earnings. These earnings are summed together and then divided by 420, which is the number of months in 35 years. This number is known as the Average Indexed Monthly Earnings (AIME).
Once the AIME is calculated, a formula is applied to determine the Primary Insurance Amount (PIA). The PIA is the basic benefit amount a retiree would receive if they retired at their full retirement age (FRA) which is usually between age 66 and 67.
As simple as this can seem, the formula to get from your AIME to your PIA isn't just a percentage. Instead, it uses what are called "bend points." These are benefit thresholds based on the amounts of your AIME. Bend points are adjusted annually to reflect changes in the national average wage index, and, for 2025, these thresholds are $1,226 and $7,391.
Here's how the formula works step-by-step to arrive at your PIA:
- The first portion of your AIME (up to $1,226) is multiplied by 90%. This means that for every dollar of your AIME up to $1,226, you'll receive 90 cents in your PIA. This higher percentage for the lower portion of your AIME is designed to provide a stronger base of support for lower-income earners.
- The portion of your AIME that falls between $1,226 and $7,391 is multiplied by 32%. Meaning, for every dollar of your AIME within this range, you'll receive 32 cents in your PIA. As you can see, the percentage decreases at this higher level of earnings.
- Any portion of your AIME that is above $7,391 is multiplied by 15%. For every dollar of your AIME above this amount, you'll receive 15 cents in your PIA. The percentage is the lowest for this highest level of earnings.
It's important to note that the actual monthly benefit a retiree receives may be different from the PIA depending on when you decide to start receiving benefits. If you retire before your full retirement age, your benefits are reduced. For example, if you retire at the earliest possible age of 62 in 2025, your benefit will be about 30% less than your PIA. Conversely, if you delay retirement past your full retirement age, you may receive a higher monthly benefit due to delayed retirement credits.
We recommend you get a personalized estimate of your future Social Security benefits by creating an account on the SSA website at www.ssa.gov. This will allow you to view your earnings history and use the benefit calculators.
Understanding these calculations can help you make informed decisions about when to claim benefits and how Social Security fits into your overall retirement income planning. Remember that these estimates are based on current law and could change with future legislation, so it's wise to periodically review your projected benefits as you approach retirement.
Julia Carlson is a registered representative with LPL Financial. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
Information in this material is for general information only and not intended as investment, tax, or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.
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