We calculated 3 real-life example of Social Security benefits based on personal finances, marital status, and age.
Throughout your career, you have been paying into the Social Security system. Recent estimates have shown that on average you and your employer have contributed more than $200,000 into the system for the average worker. As you approach your retirement years, you will soon begin to receive the contributions back in the form of monthly income. Let’s take a look at how Social Security calculates these benefits and three real-life examples of what you can expect to receive.
The Social Security Administration (SSA) uses a multi-step process to calculate your benefits. This calculation can be done by an individual, but it is complex and time-consuming.
SSA calculates your benefits by reviewing your lifetime earnings and adjusting it to the National Average Wage Index (NAWI) for each year. Then, SSA calculates your Average Indexed Monthly Earnings (AIME) based on the highest amount earned throughout your lifetime. After that, a formula is applied to convert your AIME into a Primary Insurance Amount or PIA. Then, your PIA gets adjusted to any Cost of Living Adjustments also known as COLA. On top of this, SSA will reduce your benefits if you claim them before your “full retirement age” (FRA) which is between 66 and 67 years old for most Americans.
As you can see, this calculation can get very complicated very quickly which is the main reason people look for other ways to estimate their Social Security benefit.
Get an idea of how much you can expect to receive from Social Security with these three scenarios. *Please note that these are benefit estimates. Your individual situation will be based on your age, income and other factors.
Jim is 56, single, and has never been married. He is currently earning $85,000 per year and has $150,000 saved for retirement to cover taxes, medical expenses, and unexpected financial situations. Jim will be relying on his benefits to pay for his living expenses. His estimated benefits vary depending on when he elects to take them:
It would be advisable for Jim to work as long as possible or collect at age 70 to receive maximum benefits.
Jason and Tonya are ages 58 and 54 respectively, and they are married. Jason currently earns $125,000 per year while Tonya has never earned a wage and therefore has not contributed to Social Security. Tonya will receive spousal benefits equal to half of Jason’s benefits at her FRA. They have approximately $350,000 in retirement savings that they can use for their living expenses. They are exceptionally healthy and expect to live into their 90’s. If Jason takes his benefits at his FRA of 67, their annual benefits would amount to:
However, if Jason and Tonya delay their benefits until age 70, their annual benefit amounts would increase to:
Since they have the resources to meet their needs during the early part of retirement, waiting until age 70 may be the most financially beneficial move.
Alex and Victoria are both 60 years old. Alex is currently earning $75,000 per year while his spouse, Victoria, earns $100,000. Their household income is $175,000 per year. They currently have $500,000 in retirement savings for unexpected financial situations and long-term health needs. The couple plan to use their Social Security benefits to maintain their lifestyle. They both plan to retire together at their FRA of 67.
If Alex and Victoria delay their benefits until age 70, their benefits increase to:
Alex and Victoria should consider taking their benefits at their FRA of 67 to minimize their portfolio withdrawals and allow it to grow.
There are multiple ways to obtain an estimate of your Social Security benefits:
The SSA invests a lot of resources into recordkeeping, systems, and software required to perform these calculations for millions of Americans. Therefore, you should feel confident with the estimates generated by the SSA. Social Security is a major part of almost every working American’s retirement plan. Understanding the best way to estimate your benefits is critical to planning for a successful retirement.