How many years do you have to work to receive Social Security?
In order to receive Social Security when you retire, you have to work a total of 40 quarters throughout your life. Those ten years can be spread anytime throughout your working life.
Once you retire, how are your benefits calculated?
Your Social Security benefits are currently calculated by taking the highest 35 years of earnings of your life and applying several adjustments. If you don’t have 35 years of positive earnings, then the years without them simply count as zero earnings for the year.
Consider this hypothetical example: You only work for thirty years at a $50,000 salary and don’t work any other time. Your thirty-five years of highest earnings would be thirty years at $50,000 and five years at $0 salary.
Next, the Social Security Administration makes some adjustments. The first adjustment is to index those 35 years of earnings by wage inflation to get a “real” dollar amount. In other words, if you earned $20,000 ten years ago, an equivalent amount today might be $25,000 after wage inflation. The SSA adjusts all thirty-five years like that.
Once your earnings are adjusted, they are added up and divided by the number of months in thirty-five years. The resulting number is called an AIME, which stands for “Average Indexed Monthly Earnings.”
We’re almost done!
Once the SSA has your AIME number, it is used to create your PIA or “Personal Insurance Amount.” The PIA is what you will receive from your monthly Social Security check.
Your PIA is calculated by taking your AIME and adjusting it by two bend points. It’s probably easier to look at a graph to illustrate how that works. You get to keep 90% of the first $885 of your AIME, 32% of the your AIME over $885 and under $5,336, and 15% of your AIME above $5,336.
In other words, if your AIME is $2,000, you get 90% of the first $885, or $796.50, and 32% of the amount above $885, or ($2,000-$885)*.32 = $356.8. Your PIA would be $1,153.30 per month.
Since there is a taxable maximum every year, there is a maximum amount that you can receive from Social Security.
Lastly, your PIA is adjusted if you retire at any other time than the full retirement age. If you retire early, your PIA will be adjusted downward. If you work past full retirement age, your PIA gets increased.
How about an example?
Let’s take a stylized example assume that the Social Security calculation only requires five years of earnings instead of thirty-five years.
Step one is to write out the earnings from each year in the year that they were received.
Years Earnings
1 $50,000
2 $52,000
3 $54,000
4 $56,000
5 $58,000
Step two is to find out the wage adjustment for each year.
Years Earnings Wage Index
1 $50,000 1.082
2 $52,000 1.061
3 $54,000 1.040
4 $56,000 1.020
5 $58,000 1.000
Step three is to find “index adjusted” earnings.
Years Earnings Wage Index Index Adjusted Earnings
1 $50,000 1.082 $54,121.61
2 $52,000 1.061 $55,182.82
3 $54,000 1.040 $56,181.60
4 $56,000 1.020 $57,120.00
5 $58,000 1.000 $58,000.00
Step four is to add up the index adjusted earnings and divide by the number of months in that five year period (60). Those five years add up to $280,606.20. If we dived that number by 60, we get an Average Indexed Monthly Earnings (AIME) amount of $4,676.77.
Step five is to take that AIME and put it through the Social Security bend points to get our PIA.
If you recall, the calculation is to keep 90% of the first $885, or $796.50. Next, we get to keep 32% of the money after $885 and up to $5,336. Since the AIME is below $5,336, the calculation instead becomes ($4676.77 - $885)*0.32 = $1,213.36. (SSA rounds down to the nearest $0.10, so the final PIA would be $1,213.30.)
If our example Social Security recipient were retiring at the full retirement age of 67, that is the Social Security benefit he or she would receive every month.
How much do you lose for retiring early?
The full retirement age is currently 67, and the earliest workers can take early retirement is at age 62. If a worker retires at age 62, his or her benefits fall by up to 30 percent less than if they took benefits at age 67.
That calculation happens because for every month that someone retires early, their PIA falls by 5/9ths of one percent for the first 36 months, and 5/12 of one percent for the 24 months after that.
Do benefits ever go up?
If inflation is high enough, Social Security recipients receive Cost of Living Adjustments (COLAs). The most recent COLA for 2019 was 2.8 percent. [1]
What does AIME stand for?
AIME stands for Average Indexed Monthly Earnings and is calculated from your wage-indexed highest thirty-five years of earnings from your career.
What does PIA stand for?
PIA stands for Personal Insurance Amount, and represents the benefit a person would get if they retired at the full retirement age.
Are my Social Security benefits taxed?
They are if your income is high enough. Between 50% and 85% of your Social Security benefits are taxed if your total income is above $25,000 if single and $32,000 if a joint filer [2]. However, only about 30% of Social Security recipients are taxed on their Social Security benefits [3].
For more resources, visit SSA’s pages for Primary Insurance Amount, Social Security Benefit Amounts, and Benefit Calculation Examples for Workers Retiring in 2019.
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[1] SSA 2019 COLA, https://www.ssa.gov/cola/
[2] SSA: https://www.ssa.gov/planners/taxes.html
[3] http://www.kiplinger.com/article/taxes/T051-C000-S001-are-your-social-security-benefits-taxable.html
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