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How to Calculate Social Security Benefits

Social Security can be tricky to understand, with the various retirement ages and payout amounts. What makes it even trickier is that, in an effort to save money, the Social Security Administration stopped sending paper statements that helps explain some of those calculations. Fortunately, we were able to take a look at those tables and with a little extra work, we can help explain a little bit of the strategy involved in when to start taking Social Security payments and how that decision can affect how much you ultimately receive from the program.

Retirement Age

If you were born after 1960, you have to wait until you’re 67 years old to receive the full payout. For those born before 1959, the retirement age is between 65 and 66 according to this calculator [3]. You can take payments as early as 62 but your payouts will only be 70% of your entitled amount. If you wait until you’re 70 years old to begin taking payments, you would get 32% more than your entitled amount. After 70, there is no additional benefit [4].

The Calculation

The amount you receive from Social Security is based on your 35 highest grossing years in the workforce. These wages are adjusted for inflation and if you don’t have 35 working years, zeros are averaged in to the amount since you didn’t pay anything in to Social Security during non-working years. The amount of your income that is paid by Social Security is based on how much you earn.

There are a variety of websites that can help you with these calculations. The Social Security website has a calculator [5] that will estimate your payout but it doesn’t include spousal benefits or any deductions for Medicare payments.

The AARP website [6] wants you to wait as long as possible to apply for benefits and they have a calculator to show you why. This calculator allows you to factor in spousal benefits allowing couples to make decisions based on more than just individual calculations.

What If You Still Work?

Social Security allows you to work and receive benefits at the same time but if you’re under the retirement age, your checks will be reduced but that money isn’t lost. Once you reach full retirement age, the money that was deducted from your payments will be paid in addition to your full benefit. If you want to see how your payouts will be impacted if you work and apply for benefits before retirement age, check out this page [7].

Your Spouse

Your married spouse can claim benefits based on their own work record or 50 percent of the higher earner’s benefit, whichever is greater. Spouses may be able to claim a survivor’s benefit when the higher earning spouse passes away. Check out this page [8] for more information on spousal benefits.

Further Reading

Figuring your retirement benefits is complicated and may take in to account other factors not mentioned here like Medicare benefits and maximum income limits when taking payments before retirement age while working. If you’re planning to retire in the near future, contacting the Social Security Administration, however laborious, is the best way to gain that information.

(Photo: tracy_olson [9])