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How Social Security Benefits are Calculated

Published by Bob Gustafson

How Social Security Benefits are Calculated

How much can you expect to receive in your social security benefits checks in the future?

The Social Security Administration (SSA) uses a complicated formula to determine each individual’s unique social security benefits, based on your reported earnings. (Remember the word ‘reported’ for important information coming up in this post.) Here’s a basic look at how the SSA configures what your social security payments will be when you elect to start receiving benefits:

The SSA configures an average summary of your earnings for up to 35 years by using the number of years, and taking the sum of your highest indexed earnings years. This average amount is known as your Primary Insurance Amount (PIA). They then divide that amount by the number of months in those chosen years. This creates what is known as your Average Indexed Monthly Earnings or AIME.

This is the basis for determining your social security benefits, with several extra steps added in the formula, including some PIA variance that can change annually with changes in the national wage index. The PIA formula is fixed by law and can be complicated to figure out in some circumstances, but this is the general method by which the SSA determines what your social security checks – and those of your spouse and family members – will be.

While it sounds like maximizing your social security benefits is out of your hands, there are actually smart steps you can take to ensure you’ll receive the highest benefits possible.

Watch out for those $0 years.

Let’s say you decide (or decided) to spend the year after your college graduation traveling the world, and delay/delayed getting a job. You would have a $0 income year included in your annual income summary. Let’s say you’re thinking of taking a year off between jobs. You would have a $0 income year included in your annual income summary. Let’s say you spent some time in a ‘paying under the table’ job. Again, that’s often a $0 in your income summary, since you had no official income reported. If at all possible, avoid those $0 income years.

When the SSA looks at your income history to compute your social security benefits, those $0 years count, and other annual payment amounts are gathered to compute your PIA. If you didn’t take a year off, you might have had $50,000 as your income for that year. Because you took the year off, a $30,000 income year takes its place.

So now you know this for the present, but what about the past? It may be twenty years since you took that summer of travel instead of working. You have, and can’t change, a $0 income entry in your history. One solution is to put off retirement by a year or two to add an extra year or years of income to your record, thereby creating extra income years for the SSA’s tally.

Check your income record for errors.

You likely receive a statement from the SSA listing your past years’ income. If you’re like most people, you just filed that statement away without questioning anything on it. But errors do occur sometimes, and it would be unfortunate to receive lower amounts in your social security checks someday because the formula was calculated using faulty data.

Log into the SSA website at to check the numbers they have for your past years’ income against your tax returns, and if you spot an error, you can seek to get those errors rectified for your benefit. This brings up an important tip: even though it’s often said that you only need to save your financial paperwork for seven years, always hang on to your tax returns. It would be so much easier to check your past years’ income levels if you have your print tax returns on hand. If those papers stack up over the years, you can always scan them onto a drive for safe-keeping. Being able to check your tax returns for your income amounts each year can mean that the errors you’re able to correct with the SSA add up to bigger social security checks in the future. The extra work will pay off.

Don’t retire too early.

Let’s say you decide to work a few extra years past the official retirement age when you could start taking social security. Your income amounts from these years can replace the amount from some of your lower income years. If the job you stay in pays, for instance, $70,000 annually, those first few lower-income years you spent right out of college can get bumped out of the equation. If you’re able to work, and enjoy your work to any degree, it can be smarter to stay in the workforce for a number of additional years for your social security benefits formula as well as for the added social interaction and work culture perks that can keep you engaged in life and healthier.

If you don’t collect social security at your official retirement age, you’ll get a significant upward adjustment on your social security benefits for when you are ready to collect.

We always advise talking to your financial professional before you make any decisions regarding your retirement choices, investments and social security benefits. Working with a financial planner can help you maximize your own benefits, and understand how your social security benefits would work for your spouse or partner in the event of your death as well as how your partner’s benefits would work for you. A financial advisor offers an objective view of your financial outlook, and can perhaps save you from making a dire mistake when it comes to your retirement and social security choices.

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