Social Security: How is it Calculated?
As you approach retirement, you’ll want to know what your future Social security payment will be. As I talk to readers, I find there is confusion about how benefits are calculated. Some think it is based on your last five or ten years of work and that taking a low paying job at that time will lower your payment amount. The truth is your benefit is calculated using amounts from your entire working history.
Social Security takes your 35 highest earning years, converts them to today’s dollars, puts the information into a formula and comes up with your benefit amount. Slight fluctuations in earnings will not affect your payment significantly if at all.
You can see your 35 highest earning years by going online to www.ssa.gov and opening a My Social Security account.
Your statement will include your entire working history and an estimate of what your benefit will be based on current information. You can also use the estimator to see how your benefit changes should you apply at different ages—62, 66, 70—and if your income changes.
Why is this important? You can use this information to help you decide when to begin collecting benefits. This will help you plan for your retirement with more reliable numbers.
If you begin collecting at 62, your payment will be decreased by about 25%, if you wait until 70, your payment will be increased about 32%. At Full Retirement Age, you will receive what Social Security deems is your full benefit.
For example, if your payment amount at Full Retirement Age is $2,000 per month, at 62 it will be $1,400 per month, and at 70 it will be $2,640. That’s a difference of over $1,200 per month.
But, it’s important to consider that by waiting, you miss out on $134,400 in payments between the ages of 62 and 70.
It takes about 10 years to break even and make up what you lost in missed payments. You must live until age 80 to make waiting to 70 to collect pay off.
Adjustments to your Social Security payment amount are permanent and will remain in place for the rest of your life. It’s good to know how your decisions will affect your overall retirement financial picture before you make them.
Planning for retirement can be difficult, but there are many tools to help you along the way. The Social Security retirement estimator can give you a more accurate look at what your future holds and contribute to a more informed retirement decision.