How is your Social Security benefit calculated?

How is Social Security calculated?

For millions of individuals, Social Security represents a stable income in their nonworking years. For many, Social Security isn't just about the dollars and cents—it's a promise that after a lifetime of hard work, there's something reliable to lean on.

Even if you have ample savings in other retirement accounts, understanding your Social Security benefits, and how much you can count on each month, will help you budget and plan for the future. Calculating Social Security benefits is fairly simple to understand in theory, but the math can be a bit complicated. Before we get to that, though, let’s look at a few basics:

Qualifying for Social Security

In order to be eligible for Social Security, you must first have accrued 40 work credits as defined by the government. You can earn a total of four credits per year, so at a minimum, you must have worked and earned a taxable income for at least 10 years.

What is the maximum Social Security benefit?

The absolute maximum benefit you could receive if you start collecting Social Security in 2024 is $4,873 per month. However, very few people will qualify for this. It would require you to begin collecting payments at age 70 and to have made nearly $10,000 per month for at least 35 years (adjusted for inflation).¹

The Social Security calculation

There’s quite a lot that goes into calculating Social Security benefits and each person will have a different number based on their age, the year they retire, past earnings, and other factors. The good news is that you don’t have to do this calculation yourself. The Social Security Administration has already done it for you. You can access the Social Security website to get a benefits estimate. Still, if you want to better understand how they arrived at that number, here is a general guideline for calculating your Social Security benefits:

Start by finding your earnings for your top 35 working years

If you’ve worked for more than 35 years, only include the 35 with the highest income.

Index the wages to account for inflation

This part is a bit trickier. Since the purchasing power of $10,000 was a lot different in 1995 from what it is today, each year of your earnings should be adjusted for inflation to more accurately reflect its relative purchasing power.

Calculate your average indexed monthly earnings (AIME)

Once you’ve adjusted your overall earnings, simply divide the total by 420 (the number of months in 35 years). This is your AIME.

Calculate your primary insurance amount (PIA)

There is a sliding scale of Social Security benefits designed to help workers with lower lifetime earnings a bit more than high earners. The idea behind this is that high earners likely had more options to save for retirement in other ways, such as through a 401(k) or IRA.

Adjust for your age when you start collecting

You can start collecting Social Security as early as age 62, but there is a penalty to do so. That penalty can be an almost 30% reduction in your monthly Social Security payment. If you wait until your full retirement age (FRA), you will receive 100% of your PIA each month. Your FRA is between 66 and 67 years of age, depending on the year you were born. In addition, you can delay your Social Security payments up to age 70, which will increase your PIA by 8% for each year you postpone taking payments.

How much Social Security will I get?

How much you get paid each month by Social Security depends on how much you’ve made during your prime working years. The more you made throughout your career, the more you paid into the Social Security program through taxes, and the more you’ll receive. There are a few other smaller factors that play into your benefit that you have more control over, and it’s important to make a Social Security plan.

How can I increase my Social Security benefit?

The first step is to make sure you work a full 35 years. If you only have 30 years of income, those last five years count as zero, which can significantly lower your benefit. The other main way you can increase your Social Security benefit is by delaying when you begin collecting those benefits. Once you reach full retirement age, you can begin collecting 100% of your benefits. But each year you wait, you can earn delayed retirement credits, which can add an additional 8%, up to age 70. That can be nearly a 30% increase in your payments. If you have the ability to bridge the gap between retirement and age 70 with other income (perhaps a period income annuity), that increase can make a big difference.

You can also take advantage of spousal, dependent, and survivor benefits if they apply to your situation. Take a deep dive into how to make the most of your Social Security benefits.

What is the average Social Security payout?

According to the Social Security Administration, the average benefit in October 2023 was $1,709.70 per month for all types of beneficiaries.² That includes retired workers, surviving spouses and dependents, and Social Security disability recipients.

Will my Social Security be enough?

It’s common to be worried that you might not have enough to maintain your lifestyle in retirement. Social Security is designed to deliver only around 40% of your preretirement earnings, after all. In most cases, to maintain your current level of spending into your golden years, you’ll need other sources of retirement income.

Calculating your retirement income

The first step to understanding your retirement picture is to add up all the savings and income streams you know you’ll have. This calculator can help. It’s not uncommon to need more than $1 million total, even for a modest retirement. That may seem like a lot, but it’s not as difficult to get there as you may think.

How much will you spend each year?

There are many options for deciding how to budget for each year of retirement to ensure that you don’t run out of funds. One of the most common is the 4% rule for retirement—a simple rule of thumb based on historical market data and 30 years of retirement—but there are also many other ways to figure out how much you can safely spend. Ultimately, working with a financial professional to understand your savings, assets, and goals is the safest way to create an individualized plan for your ideal retirement.

Catching up on savings

If you find that you don’t have quite as much retirement savings as you’d like, don’t panic. You’re not alone. 63% of Americans are worried they may not have enough savings.³ There are plenty of strategies you can use to both lower your retirement spending and quickly catch up on savings, while still planning for the retirement you deserve.

Social Security benefits FAQs

This article is provided for your general informational purpose only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

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¹“Workers with Maximum-Taxable Earnings,” Social Security Administration, November 2023.

²“Monthly Statistical Snapshot,” Social Security Administration, October 2023.

³Lydia Saad, “Americans’ Financial Worries Tick Up in Past Year,” Gallup, May 9, 2022.