February 27, 2020

Edited 05/19/20

3 Real-Life Social Security Benefits Examples

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, the tables are about to turn and you will begin receiving 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.

How does SSA calculate benefits:

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” 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. 

3 Real-Life Examples of Benefits

Social Security benefits are based on how much he or she earned through 35 years of working. Below are three real-life examples ranging in income, marital status, and retirement age. 

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. 

Meet Jim:

Jim is 56, single, and has never been married. He is currently earning $85,000 per year. When Jim turns 67, his full retirement age, he is expected to receive $28,655 per year. If he selects an early benefit at age 62, he will receive $20,059 annually. However, if he delays his benefit to age 70, his benefit will grow to $35,532 annually. Jim will be relying on his benefits to pay for his living expenses. He currently has $150,000 saved for retirement to cover taxes, medical expenses, and unexpected financial situations. It would be advisable for Jim to work as long as possible or collect at age 70 to receive maximum benefits.

Meet Jason and Tonya:

Jason and Tonya are ages 58 and 54, respectively. They are married. Tonya has never earned a wage and therefore has not contributed to Social Security. Jason currently is earning $125,000 per year. At age 67, which is the full retirement age for Jason, his benefit will be $37,255 per year. Once Tonya reaches her full retirement age of 67, she will begin to receive a spousal benefit equal to 50% of Jason’s benefit. This will be an additional $18,627 per year. This brings their household total to $55,882 per year.

If Jason were to delay his benefit to age 70, his annual amount would then be $46,196. Tonya’s spousal benefit would also increase to $23,098 at her full retirement age of 67. This would bring their combined Social Security benefits to $69,294. Tonya and Jason have approximately $350,000 in retirement savings that they can use for their living expenses. They both are exceptionally healthy and expect to live into their 90’s. 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.

Meet Alex and Victoria:

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 both plan to retire together at their full retirement age of 67.

At age 67, Alex will begin to receive an estimated benefit of $24,452 while Victoria will receive approximately $29,775. This will make their total household income from Social Security around $54,227 per year. By waiting until age 70 this will increase Alex’s benefit to $30,320 annually and Victoria at age 70 would see her benefit increase to $36,921. This would bring their combined social security income to $67,241. They currently have $500,000 in retirement savings for unexpected financial situations and long-term health needs. They are planning to use their Social Security benefits to maintain their lifestyle. They should consider taking their benefits at their full retirement age of 67 to minimize their portfolio withdrawals and allow it to grow.

3 Ways to Estimate Your Social Security Benefits 

There are multiple ways to obtain an estimate of your Social Security benefits:

  1. Receive an estimate of your benefits by visiting the Social Security Administration’s website at SSA.gov. Here, you will be able to create an account and use one of its online benefit calculators to estimate your benefit based on your earnings record. 
  2. Use one of the many calculators that are available online from a variety of sources. Typically, financial institutions that work with retirees will have some version of a calculator that can be used to estimate your benefits. These calculators can vary in their results, so it’s best to compare several calculators to the results provided by the SSA. Here are some calculators from Bankrate and the Center for Retirement Research at Boston College.
  3. Visit a local Social Security office to review your past earnings and get a calculation of your expected benefit. This option is a little more challenging as it requires the use of your time to schedule an appointment and travel to the SSA office. The benefit of this is you can review your work record for accuracy and will be able to ask questions about the estimated benefit.

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.