How to Calculate Social Security Benefits: A Step-by-Step Guide

A hands-on guide to running the numbers behind your Social Security

Image shows an older woman working at a computer with paperwork and a calculator. Text reads: "4 factors for determining social security benefits: how long you work, how much you make every year, inflation, what age you begin taking your benefits."

The Balance / Emilie Dunphy

A complex formula determines how your Social Security benefits are calculated. The following factors go into the formula:

  • How long you work
  • How much you make each year
  • Inflation
  • At what age you begin taking your benefits

Take a look at how these factors affect the benefits you will receive and how the Social Security Administration calculates its figures.

Key Takeaways

  • Your Social Security benefit is decided based on your lifetime earnings and the age when you retire and begin taking payments.
  • Your lifetime earnings are converted to a monthly average based on the 35 years in which you earned the most, adjusted for inflation.
  • Those earnings are converted to a monthly insurance payment based on your full retirement age.
  • Your monthly payment will decrease or increase if you retire earlier or later than your full retirement age.

How Is Social Security Calculated?

There is a three-step process used to calculate the amount of Social Security benefits you will receive.

Step 1: Use your earnings history to calculate your Average Indexed Monthly Earnings (AIME).
Step 2: Use your AIME to calculate your primary insurance amount (PIA).
Step 3: Use your PIA, and adjust it for the age when you will begin receiving benefits.

You can use a copy of your Social Security statement that provides your earnings history to plug your own numbers into the formulas below.

Step 1: Calculate Your Monthly Earnings

Your Social Security benefit calculation starts by looking at how long you worked and how much you made each year. It is used to calculate your AIME. Here's how to find it.

List Each Year's Earnings

Your earnings history is shown on your Social Security statement, which you can now obtain online.

In the table below, sample earnings for a hypothetical worker born in 1953 are shown in Column C. Only earnings below a specified annual limit are included. This annual limit of included wages is called the "Contribution and Benefit Base" and is shown as Max Earnings in Column H in the table.

Adjust for Inflation

Social Security uses a process called "wage indexing" to determine how to adjust your earnings history for inflation. Each year, Social Security publishes the national average wages for the year. You can see this published list on the National Average Wage Index page.

Your wages are indexed to the average wages for the year you turn 60. For each year, you take the average wages of your indexing year (which is the year you turn 60) divided by average wages for the years you are indexing, and multiply your included earnings by this number.

Example:

  • In the table below, see actual wages of $21,000 for 1984 in Column C.
  • In column D are the average wages according to the National Wage Index.
  • Take $44,888.16, which is the average income for the year this person turned 60 (2013), divided by $16,135, to get the Index Factor you see in Column E.
  • Multiply 1984's earnings by this index factor to get $58,423, which you see in Column F.

Because of how the wage indexing formula works, if you are not yet age 62, your calculation to determine how much Social Security you will get is only an estimate. Until you know the average wages for the year you turn 60, there is no way to do an exact calculation. However, you could attribute an assumed inflation rate to average wages to estimate the average wages going forward, and use those to create an estimate.

Average the Highest 35 Years

The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.

Total the highest 35 years of indexed earnings, and divide this total by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.

For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total $1,919,040. Divide by 420 to get an AIME of $4,569.

How to Calculate Your AIME for Social Security Benefits
A B C D E F G H
Year Age Actual Wages Average Wages Index Factor Indexed Wages After Cap Highest 35 Years Max Earnings
undefined undefined From Social Security statement From S.S.A. website Age 60 Avg. Wage / Actual Year's Avg. Wage Multiply Year's Actual Wages by Year's Index Factor Take 35 highest Indexed Wages. Enter 0 for missing years From S.S.A. Website
1971 18 1,000 6,497.08 6.909 6,909 N/A 7,800
1972 19 2,000 7,133.8 6.292 12,586 N/A 9,000
1973 20 3,000 7,580.16 5.922 17,766 N/A 10,800
1974 21 4,000 8,030.76 5.590 22,360 N/A 13,200
1975 22 5,000 8,630.92 5.201 26,010 N/A 14,100
1976 23 6,000 9,226.48 4.865 29,196 N/A 15,300
1977 24 7,000 9,779.44 4.590 32,137 N/A 16,500
1978 25 8,000 10,556.03 4.252 34,024 N/A 17,700
1979 26 9,000 11,479.46 3.910 35,199 N/A 22,900
1980 27 10,000 12,513.46 3.587 35,872 35,872 25,900
1981 28 11,000 13,773.10 3.259 35,850 35,850 29,700
1982 29 18,000 14,531.34 3.089 55,603 55,603 32,400
1983 30 20,000 15,239.24 2.946 58,911 58,911 35,700
1984 31 21,000 16,135.07 2.782 58,423 58,423 37,800
1985 32 22,000 16,822.51 2.668 58,703 58,703 39,600
1986 33 23,000 17,321.82 2.591 59,603 59,603 42,000
1987 34 24,000 18,426.51 2.436 58,466 58,466 43,800
1988 35 25,000 19,334.04 2.322 58,043 58,043 45,000
1989 36 25,000 20,099.55 2.233 55,832 55,832 48,000
1990 37 25,000 21,027.98 2.135 53,367 53,367 51,300
1991 38 27,000 21,811.60 2.058 55,666 55,666 53,400
1992 39 29,000 22,935.42 1.957 56,757 56,757 55,500
1993 40 30,000 23,132.67 1.940 58,214 58,214 57,600
1994 41 36,000 23,753.53 1.890 68,031 68,031 60,600
1995 42 37,000 24,705.66 1.817 67,226 67,226 61,200
1996 43 38,000 25,913.90 1.732 65,824 65,824 62,700
1997 44 39,000 27,426.00 1.637 63,831 63,831 65,400
1998 45 40,000 28,861.44 1.555 62,212 62,212 68,400
1999 46 41,000 30,469.84 1.473 60,401 60,401 72,600
2000 47 42,000 32,154.82 1.396 58,632 58,632 76,200
2001 48 40,000 32,921.92 1.363 54,539 54,539 80,400
2002 49 40,000 33,252.09 1.350 53,997 53,997 84,900
2003 50 40,000 34,064.95 1.318 52,709 52,709 87,000
2004 51 43,000 35,648.55 1.259 54,145 54,145 87,900
2005 52 45,000 36,952.94 1.215 54,663 54,663 90,000
2006 53 46,000 38,651.41 1.161 53,423 53,423 94,200
2007 54 48,000 40,405.48 1.111 53,325 53,325 97,500
2008 55 50,000 41,334.97 1.086 54,298 54,298 10,2000
2009 56 44,000 40,711.61 1.103 48,514 48,514 10,6800
2010 57 44,000 41,673.83 1.077 47,394 47,394 10,6800
2011 58 46,000 42,971.61 1.045 48,052 48,052 10,6800
2012 59 48,000 44,321.67 1.013 48,614 48,614 11,0100
2013 60 45,000 44,888.16 1 45,000 45,000 11,3700
2014 61 45,000 44,888.16 1 45,000 45,000 11,7000
2015 62 - 44,888.16 1     11,8500
          TOTAL 1,919,040 ($4,569/mo.)  

Step 2: Calculate Your Primary Insurance Amount (PIA)

Once you have calculated your average indexed monthly earnings (AIME), you'll plug that number into a formula to determine your primary insurance amount, or PIA. This formula is based on something called "bend points."

Social Security Bend Points

The Social Security benefits formula is designed to replace a higher proportion of income for low-income earners than for high-income earners. To do that, the formula uses what are called “bend points." These bend points are adjusted for inflation each year.

Bend points from the year you turn 62 are used to calculate your Social Security retirement benefits. The example in the table below uses 2020 bend points. It works like this:

  • You take 90% of the first $906 of AIME.
  • You take 32% of the next $5,785 of AIME.
  • You take 15% of any amount over that $5,785.
  • You total those three numbers.

The result is your primary insurance amount, or PIA, the amount you will receive if you begin benefits at your Full Retirement Age (FRA).

Your PIA is rounded to the next lowest dime, and your benefit amount is rounded to the next lowest dollar.

Technically, your PIA is calculated, rounded to the next lowest dime, and then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Then any increase or decrease based on age is applied. That number is then rounded down to the next lowest dollar.

You can see current and historical bend points and the current year's bend points on the Bend Formula Bend Points page of the Social Security Administration's website.

If you are not yet 62, your benefit calculation is only an approximation, as you do not yet know what the final bend point amounts for the year you turn 62 will be. You can use an estimated inflation rate to approximate future years' bend points to develop a pretty accurate approximation.

In the example in the table below, you can see how the AIME calculated in the previous step was plugged into the bend point formula to calculate the PIA.

Using AIME to Calculate Primary Insurance Amount (PIA)
Example using AIME of $4,569 / month Taxable Wage Amount Multiplier Solved
Bend 1 (up to $826) 826 .90 743.40
Bend 2 ($4,569 - $826) 3,743 .32 1,197.76
Excess N/A .15 0
Sum     1,941.20
PIA After Rounding (down to nearest dime and dollar)     $1,941
Benefit at Full Retirement Age (FRA)     $1,941

Can Your PIA Change After You Reach Age 62?

There are two things that affect your PIA after you reach age 62:

  1. Higher earnings: Earnings in years between age 62 and 70 that are higher than one of the 35 highest earnings years previously used in the formula will change your AIME which is used in the PIA formula.
  2. Inflation: Your PIA will be adjusted by the same cost-of-living adjustments applied to people who are already receiving Social Security benefits. You can see historical cost-of-living adjustment rates on the Social Security Administration's website.

You may get the wrong answer when running your own calculations on when to begin Social Security if you simply take the numbers off your statement and do not properly apply inflation adjustments.

Step 3: Adjust Your PIA for the Age You Will Begin Benefits

The final amount of Social Security retirement benefit that you receive is based on the age when you begin benefits.

The earliest you can begin retirement benefits is age 62 (age 60 if you are eligible for a widow or widower's benefit on a deceased spouse's or ex-spouse's record). You get more by waiting until a later age—as late as age 70—to begin benefits.

Of course, another complex formula is used to determine how much more you will receive if you wait.

This formula uses your Primary Insurance Amount (PIA) calculated in the previous step. This is the amount you will get if you start benefits at your full retirement age (FRA). Your FRA can vary, depending on the year you were born. For people born between 1943 and 1954, as in our example, the FRA is age 66.

For people born on Jan. 1, the FRA is based on the year prior. Someone born on Jan. 1, 1955, will have an FRA based on 1954.

A reduction is applied to your PIA if you begin benefits before your FRA. A credit, referred to as a "delayed retirement credit," is applied if you begin to receive benefits after your FRA.

Beginning Benefits Before FRA

If you choose to begin to receive benefits before you reach your full retirement age, one or both of the following calculations will apply:

  • 5/9 of 1%: Your benefits are reduced by 5/9 of 1% per month, up to a maximum of 36 months, depending on how many months you have until you reach FRA.
  • 5/12 of 1%: If you are more than 36 months away from reaching FRA, the reduction above is applied, and then for the number of months greater than 36, the benefit is further reduced 5/12 of 1% per month.

Therefore, if your FRA is age 66, your benefits would be reduced by 25% if you begin taking them at age 62. Find that figure by taking 5/9 of 1%, or 0.56; multiply by 36 months to get 20%. Then, 5/12, or 0.42, multiplied by the remaining 12 months, is 5% for a total of 25%.

Credit for Taking Benefits Later Than FRA

If you were born in 1943 or later, your benefits will increase by 2/3 of 1% per month, or 8% per year, for each month that you are past your FRA when you begin to receive benefits. Survivor benefits for a widow or widower will also receive these delayed retirement credits.

Therefore, If your FRA is 66, your benefits would be increased by 32% by waiting until age 70 to begin (8% per year times four years).

How Inflation Impacts Your PIA

Your PIA is calculated at age 62. If you wait beyond age 62, cost-of-living adjustments (COLAs) will be applied to your PIA for each year afterward.

If you have already had most of your 35 years of earnings, and you are near age 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cos- of-living adjustments. Many people do not account for this when doing their own calculations, which can lead them to think that taking Social Security early is a better deal, when waiting is often the better deal.

In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits.

Effect of Age on Claiming Benefits
Year Age Year PIA in today's dollars PIA with 2% inflation
2013 60 2013 N/A N/A
2014 61 2014 N/A N/A
2015 62 2015 $1,455.99 $1,456
2016 63 2016 $1,553.06 $1,584
2017 64 2017 $1,682.48 $1,750
2018 65 2018 $1,811.90 $1,923
2019 66 2019 $1,941.32 $2,101
2020 67 2020 $2,096.63 $2,315
2021 68 2021 $2,264.36 $2,550
2022 69 2022 $2,445.50 $2,809

Frequently Asked Questions (FAQs)

How do you calculate your Social Security taxes?

"Social Security taxes" can refer to taxes paid into the Social Security system or taxes paid on Social Security benefits. The taxes that fund Social Security come from the payroll tax, which is 6.2% for employees or 12.4% for self-employed individuals.

When you're receiving Social Security benefits, you'll still have to pay income taxes, but you won't owe taxes on all of your benefits. Those whose total annual income tops $34,000 ($44,000 for those filing joint returns) will pay income tax on 85% of their Social Security benefits. Otherwise, they will pay income tax on 50% of their Social Security benefits.

How do you calculate spousal Social Security benefits?

Spouses may receive up to 50% of their partner's PIA, but claiming benefits before reaching full retirement age can reduce this amount.

When will I receive my Social Security check?

The Social Security Administration's payment calendar helps recipients plan for payments. If you were born in the first 10 days of your birth month, then you receive payments by the second Wednesday of the month. Those born on the 11-20 receive payments by the third Wednesday. Those born on the 21-31 receive payments by the fourth Wednesday. However, those who began receiving payments before May 1997 receive payments by the third day of each month.