How Are Social Security Benefits Calculated?

A popular question that I hear from babycalculated as zero for purposes of determining
boomers getting ready to retire is "how are myyour benefit amount.
Social Security benefits calculated?" This is anPlanning tip: If you have close to 35 years of
important question because it could affect howearnings and you are close to retirement, you will
long you need to work, whether you shouldbenefit greatly by continuing to work until you
continue to work during your retirement years, orhave 35 full years of earnings to include in your
other aspects of your retirement plan.benefit calculation. The majority of people this will
First, please note that you receive a Socialaffect are women who took time off work to
Security benefit estimate each year in the mail,raise a family.
usually around your birth date. There are alsoThe top 35 years of earnings are then divided by
several calculators available on the Social Security35 to arrive at your average indexed monthly
website to help you estimate how much yourearnings (AIME). A formula is applied to your AIME
retirement benefits will be, so you don't need toto determine your primary insurance amount
know how to calculate the benefit yourself.(PIA). We won't go into the specifics of the
It's still helpful to know how your benefit isformula; the important thing to note is that your
calculated, however, so here are the basics:PIA is the full unreduced benefit you would
Basically, your top 35 years of earnings arereceive if you retired at your full retirement age
indexed for inflation, then averaged to determine(age 66 for people born between 1943 and 1954).
the basis for your monthly benefit. If you workedThis amount will be reduced if you take early
less than 35 years, the missing years will beretirement or increased if you retire after age 66.