In this article:
The amount of your monthly Social Security retirement benefit depends on multiple factors, including how much you earn over your working life, how old you are when you retire and allowances for inflation. Understanding how the payment is calculated can help you estimate what to expect and better position yourself to plan for retirement. Here's how it works.
How Are Social Security Benefits Calculated?
Your Social Security payments are calculated based on the following factors.
To qualify for Social Security retirement benefits, you generally must have worked (and paid into Social Security) for at least 10 years over the course of your lifetime. The Social Security Administration (SSA) determines eligibility based on the number of "credits" you've accrued by working and paying Social Security taxes. You can earn up to four credits each year and at least 40 must be earned to become eligible for Social Security benefits.
The amount of your benefit is calculated using up to 35 years of work earnings. If you have fewer than 35 years with earnings, years without work count as zero, which can reduce your monthly payments. (If your top 35 earning years include some with zero income, delaying retirement to work can boost the amount you'll eventually collect as a monthly benefit.)
Note that the SSA sets a maximum income amount each year that is subject to Social Security tax. For 2021, that taxable maximum is $142,800. The taxable maximum also serves as an upper limit on the earnings used to calculate retirement benefits: If your annual income exceeds the taxable maximum amount for any year of your working life, the taxable maximum, and not your actual earnings, will be used in SSA benefits calculations.
When calculating your monthly retirement benefit, the SSA multiplies your earnings for each year of your working life by an adjustment factor derived from the national wage indexing series (NWI). Doing so yields indexed earnings for each year, which take into account the rate of change in real wages over the years you worked. Indexing is designed to make Social Security retirement benefits reflect overall growth in standard of living that the country experienced during your working life.
The SSA then counts how many of your working years have nonzero indexed earnings. If the number is 35 or greater, it adds up indexed earnings for the 35 years with the highest indexed earnings, then divides by 420 (35 years x 12 months) to get your averaged indexed monthly earnings (AIME). If the number of years with nonzero indexed earnings is less than 35, SSA adds up the total indexed earnings for those years, and divides by 12 times the number of years to get the AIME. Calculated AIMEs, rounded down to the nearest whole-dollar amount, are the basis for your monthly benefit.
If you qualify for Social Security retirement benefits, you can opt to receive monthly payments when you turn 62, but the amount of that payment will be lower—possibly much lower—than if you wait until your full retirement age to begin receiving benefits. Full retirement age depends on the year you were born. For people born after 1959, full retirement age is 67; for those born before 1955 but after 1942, full retirement age is 66. For those born from 1955 to 1959, full retirement age falls between 66 and 67 in two-month increments.
If you choose to wait until after your full retirement age to receive Social Security retirement benefits, you can receive delayed retirement credits of 8% of your annual benefit for each year through age 69; no additional credits accrue from age 70 and beyond.
Adjustments for Inflation
The Social Security Administration applies annual cost of living adjustments to protect the buying power of retirement benefit payments from the effects of inflation. The adjustment is reset each year, based on the Department of Labor's Consumer Price Index.
The Social Security Administration considers you retired as soon as you begin receiving your retirement benefits. You can continue working as long as you like, but if your annual earnings in retirement exceed set income limits, your Social Security retirement benefit will be reduced. Limits are reset annually, and different ones apply to retirees below their full retirement age and those at or above full retirement age:
- If you are below the full retirement age, your Social Security benefit will be reduced by $1 for every $2 you earn over the applicable annual limit, which is $18,960 for 2021.
- If you have reached full retirement age, your benefit will be reduced by $1 for every $3 you earn over and above the applicable annual limit, which is $50,520 for 2021.
Maximum Social Security Benefits You Can Get
The maximum monthly Social Security benefit available to someone retiring in 2021 is $3,895, which assumes that:
- They worked 35 years or more
- In their 35 top-earning years, their income met or exceeded the SSA's maximum taxable amount, so that they paid the largest Social Security tax amount possible for each of those years
- They are retiring at age 70, which entitles them to the maximum delayed retirement credit
For comparison, the table below lists the monthly benefits for workers who plan to retire in 2021 whose earnings met or exceeded the SSA maximum-taxable limit every year of their working lives, from age 22. This situation is far from typical, but it shows the impact of retirement age on Social Security benefits, isolated from other factors.
|Maximum Social Security Benefit for Workers Retiring in 2021|
Source: Social Security Administration
How to Calculate Your Social Security Benefits
The math involved in calculating your monthly Social Security benefits can get pretty gnarly. Fortunately, the Social Security Administration makes it easy with a couple of tools, both of which use your Social Security number (SSN) to pull income from your tax-return history:
The Quick Calculator lets you plug in your date of birth, SSN and anticipated year of retirement to get an estimate of your monthly Social Security retirement benefit.
Your Social Security Statement offers a much more comprehensive and useful view into your future retirement benefits. To obtain your statement, you must set up a free online account at the SSA website, a process that takes a couple of minutes and requires access to email or a cellphone.
When you log in, you can view or download your statement, which summarizes your progress toward eligibility for Social Security retirement benefits, Medicare eligibility and the career earnings upon which your benefits will be based. Your account page at the website also offers interactive tools you can use to compare the estimated benefits you'll get when you retire at various ages and shows you how much benefit your spouse or other survivors would get upon your death.
The SSA recommends you check your Social Security statement annually to track how future benefits may change with shifts in your earnings and in the national economy. Consider checking your Social Security statement and your credit reports annually, as part of a yearly financial health review.