How Do They Figure Out How Much You Receive for Social Security in Retirement?
Social Security retirement benefits accumulate over years of work. Accurate calculations for benefits require a list of your Social Security income over a period of 35 highest-earning years. Social Security provides the list to the most current date of record in the annual Social Security Statement sent to your home once a year. If you do not have a list of your income, you may rely on the list it provides to calculate your Social Security base or primary insurance amount.
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Indexing
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Social Security indexes your income from years back with a complex formula that brings your old income up to present value. Each year has a different index. If you were working in 1970, your income-indexing figure for that year is 6.68 up to the $7,800 contribution limit for that year. Social Security indexes income from 1980 at 3.30. The maximum contribution for Social Security in 1980 was $25,900. Indexing accounts for inflation to give you the current value of your 1970 or 1980 income or current value for any other year.
AIME
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Calculate Average Indexed Monthly Earnings by totaling the indexed earnings for your 35 highest-earning years and dividing by 420, or the number of months in 35 years. Round down to the nearest dollar amount. This is the AIME figure used to calculate the primary insurance amount.
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Calculating PIA
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The primary insurance amount calculations change from year to year, based on the year the retired worker reaches 62. A retired worker who reaches age 62 in 2010 uses bend points or breaks of $761 and $4,586 to calculate the PIA in three parts. The first $761 from the AIME figure counts at 90 percent. The second tier subtracts $761 from $4,586 to arrive at $3,825 that counts at 32 percent. The third tier is any amount in excess of $4,586 times 15 percent. Social Security rounds these figures to the lower 10 cents, so all figures end in zero. Add any recent cost-of-living adjustments to arrive at the PIA.
Using PIA
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The primary insurance amount is 100 percent of your benefit at full retirement age and all other calculations use this as the base. If you were born between 1943 and 1954, your full retirement age is 66. If you choose to collect your retirement benefits early, Social Security reduces your PIA calculation about 25 percent. If you collect benefits at age 70, your benefit is increased 30 percent beyond your PIA to give you 130 percent. If you would like to calculate your Social Security retirement benefits, Social Security provides a worksheet and instructions. Alternatively, you may request a Social Security statement with information to a specific date when you plan to retire.
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