Video: How To Calculate Social Security Benefits



hello everyone this is Devin Carroll with Social Security Intelligence comm most of the programs administered by the federal government have really complicated rules and that can certainly seem to be the case when you're trying to figure out how in the world do they calculate Social Security benefits you know I can remember before I understood the rules I struggled to understand how the Social Security Administration determined who would get what benefit amount but once I distilled the several pages of calculation rules I realize there's only four simple steps I think it's important that you understand the social security benefits calculation whether it's for your own benefits or you're advising clients you need to know how to do this formula if you do not only we be in a better position to plan but you may be able to spot mistakes and fix them before it's too late let's get started with a first step so the first step which generally occurs at age 60 all of your prayer earnings are adjusted for inflation this adjustment is simply meant to ensure that your Social Security benefit reflects today's cost of living if your benefit was based on your actual non inflation adjusted earnings it would probably be much lower let me give you an example here let's assume that an individual started working in 1976 at the age of 25 his earnings that year were $15,000 throughout the course of his career he averaged a 3% increased his annual salary by the time he retired at age 66 his salary was fifty thousand three hundred and ninety eight dollars these are the earnings amount that the Social Security Administration needs to conduct their benefits calculation but they don't take these earnings and use them at face value instead they'll take all the actual earnings at age 60 and adjust them for inflation they'll often refer to these as the indexed earnings and again this inflation adjustment is simply meant to ensure your Social Security benefit is reflective of today's cost of living and not the cost of living from 1976 there's a table on the social Security's website that shows exactly what the multiplier is for every year going back for several decades so using those actual numbers from the Social Security website this individual would have seen his 1976 earnings index up to more than sixty six thousand dollars you'll notice that as we go through the rest of the years of his working career almost every single year gets indexed upward for inflation you'll also notice that earnings after age 60 do not get indexed but instead they're used at their face value so it's not actual earnings but it's these adjusted earnings these inflation indexed earnings that are used in the first step of the calculation so step one is adjust everything upwards for inflation once all the earnings are indexed upwards for inflation to reflect today's cost-of-living it's time for step two the Social Security Administration wants to understand what was the average monthly inflation adjusted earnings during an individual's working career they refer to this as the average indexed monthly earnings often on the Social Security website they'll simply refer to it by the acronym aim the aim is simply the average of your monthly inflation adjusted earnings while you're working with one caveat they only use 35 years of earnings thankfully they'll take the highest 35 years of indexed earnings so in this example there were 40 years of earnings so the years in red which were the lowest years would not be used as they are the lowest five years what's left is the highest 35 years from there it's very simple you sum up the highest 35 years in this case it's 1.7 million and some change but remember we're trying to determine what the monthly amount is so you divide it by 420 which is the number of months in 35 years when you do that calculation you'll see that the average indexed monthly earnings is 4097 dollars now that we know the aim it's time to move on to step three step three is where the actual PIAA is calculated now the PIAA stands for your primary insurance amount but it's the same thing as your full retirement age benefit to arrive at your PAA there is a progressive formula the aim that's the calculation from the last step is applied to the bin point formula to determine how much your Social Security benefit will be at your full retirement age in this bin point formula your aim is rent through these multipliers to determine the PIAA now these numbers change on an annual basis but for 2016 the bin points that you see on the screen are correct the first eight hundred and fifty six dollars of aim is applied to the benefit amount at ninety percent in the second range between eight hundred and fifty-seven and five thousand one hundred and fifty-seven the aim is applied to your benefit amount at 32 percent since we used an aim of four thousand ninety seven dollars there is nothing left to apply in the last range but if there was it would be applied at fifteen percent the some of these amounts is your PA or full retirement age benefit so in this example the individuals for retirement age benefit would be one thousand eight hundred and seven dollars now at this point your benefit is set but there is still one last step to determine how much you will actually receive and benefits and that last step is determined simply by the age at which you file for this conversation it's important to know what your full retirement age actually is for those born between 1943 and 1954 you can receive 100% of your PIAA at age 66 this age increases up to birth year 1960 where the for retirement age is 67 for the purposes of this video let's assume that your full retirement age is 66 if it's later than that I'll show you how to adjust that just a moment so only at your full retirement age can you receive 100% of your primary insurance amount if you file earlier you'll get less if you file later you'll get an increase here's the way it works you can see that at the earliest filing age which is 62 you would only receive 75% of your PIAA if you wait until age 70 you'll receive a 32% increase or 8% per year there's no further increases beyond age 70 but what about if you want to file at sixty eight and four months well the good news is is that the increases or reductions are actually calculated on a monthly basis for every month after full retirement age your benefit will increase by two-thirds of one percent or 0.667 percent for the 36 month period prior to full retirement age your benefit will decrease by 0.55 five percent and for every month beyond that there's only 12 your decrease is slightly lower at point four one seven percent so that's the formula in four simple steps here they are one more time step one is they adjust all the earnings for inflation they want to reflect today's cost-of-living the second step is to calculate the average indexed monthly earnings to find out what were your average earnings over the course of your working life step three is they run that averaged index monthly earnings through that bin point formula to determine your actual retirement benefit and then step four are the reductions or increases based on your filing age I hope this was a helpful resource I hope you have a little bit more understanding now of how this benefit is calculated if I can be of any further assistance don't hesitate to visit me online at Social Security Intelligence comm have a great day

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