May 3, 2021
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How Is Social Security Payment Determined?

How Is Social Security Payment Determined?

James HawesMay 3, 2021,

Social security has always been a key source of income for those retiring in the U.S.

So, how do you find out how much social security you will receive? And what determines how much you’ll get?

It doesn’t need to be complicated, we’ll break it down for you.

Calculating Your Social Security 

Several factors affect your social security. The Social Security Administration (SSA) employs a benefits formula to calculate your social security benefits. 

Two main factors determine your social security payments;

  • Money earned in your career
  • When you chose to begin receiving payments

Inflation-Indexed earnings

Your Average Indexed Monthly Earnings (AIME) is calculated by the SSA, by the income from your top 35 years, adjusting it for inflation by multiplying it with an indexing factor. The National Average Wage Index is used to determine the indexing factor.

Primary Insurance

This is calculated to determine how much of your income will be substituted with social security payments when you do retire. The PIA (Primary Insurance Index) formula depends on three bend points; the sum of 90%, 32% and 15% of income replacements (AIME).

Other factors that affect your benefits

Some other factors determine your social security benefits. We’ll walk you through them.

  1. When you start to take your social security benefits

The SSA (Social Security Administration) determines your social security based on your retirement age. Retiring at your full retirement age (70) will get you full benefits. Retiring earlier will decrease that amount.

  1. Tax

Social Security Benefits could be taxable and if there are withheld taxes, the IRs will cut it from the benefits, upon filing your return.

  1. Medicare

Any beneficiary enrolled in Medicare (Part B, C or D) will have their premiums reduced from the Benefits check.

  1. Employment

If after reaching full retirement age you continue to work, your benefits will begin reductions of $1 for every $2 over a certain income limit.

  1. Inflation

For significant inflation any year, Cost of Living Adjustments may apply to increase your social security benefits. 

Understanding your social security benefits can help you plan your financial goals. The social security retirement age chart helps you calculate your benefits, as do some other resources available on the SSA website.

Are you looking to retire and want to calculate your social security benefits? Did you find this article useful in determining your social security benefits?

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