How To Calculate Social Security Benefits - A Step by Step Guide

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

Man calculating his Social Security benefits.
The formula used to detemine your Social Security benefits is complicated!. Siri Stafford/Digital Vision/Getty Images

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

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

In this step-by-step guide, I’ll show you how these factors impact your benefit amount.

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 you will begin benefits.

In this article I cover each of these steps and provide tables to show how the calculations work. To follow along, get a copy of your Social Security statement that provides your earnings history, use the data I link to in each section, and plug your numbers into the formulas.

Step 1: How to Calculate Your Average Indexed Monthly Earnings

Your Social Security benefit calculation starts by looking at how long you worked and how much you made each year. This earnings history is used to calculate your Average Indexed Monthly Earnings (AIME) and the calculation includes the highest 35 years of earnings history that you have.

The AIME calculation works like this (an example is shown in a table below):

1. Start with a list of your earnings each year.

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

In the example below actual earnings 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 below.

2. Adjust each year of earnings for inflation.

Social Security uses a process called wage indexing to determine how to adjust your earnings history for inflation. There are two main steps in the wage indexing process.

  • Each year Social Security publishes the national average wages for the year. You can see this published list at 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 year you are indexing, and multiply your included earnings by this number.

    Example:

    • In the example below look at 1984's earnings of $21,000 in Column C.
    • The average earnings that year were $16,135 in column D.
    • You take $44888.16, the average earnings for the year this person turned 60 (2013 highlighted in bold italics) 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 that you see in Column F.

    See two more wage indexing examples from Social Security.

    Because of how the wage indexing formula works, if you are not yet 62, your calculation to determine how much Social Security you will get is only an estimate. Until you know 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.

    3. Use your highest 35 years of indexed earnings and calculate a monthly average.

    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 example above you see the highest 35 years 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). You see this highlighted in yellow in the example above.

    The result: your Average Indexed Monthly Earnings or AIME.

    How to Calculate Your AIME for Social Security Benefits
    ABCDEFGH
    Year AgeActual WagesAverage WagesIndex FactorIndexed Wages After CapHighest 35 YearsMax Earnings
      From Tax SS Stmt.From S.S.A. WebsiteAge 60 Avg. Wage / Actual Year's Avg. WageMultiply Year's Actual Wages by Year's Index FactorIf more than 35 years avail, take highest 35 Indexed Wages. Not 35 years, enter a 0 for missing yearsFrom S.S.A. Website
    19711810006497.086.9096909N/A7800
    19721920007133.86.29212586N/A9000
    19732030007580.165.92217766N/A10800
    19742140008030.765.59022360N/A13200
    19752250008630.925.20126010N/A14100
    19762360009226.484.86529196N/A15300
    19772470009779.444.59032137N/A16500
    197825800010556.034.25234024N/A17700
    197926900011479.463.91035199N/A22900
    1980271000012513.463.587358723587225900
    1981281100013773.103.259358503585029700
    1982291800014531.343.089556035560332400
    1983302000015239.242.946589115891135700
    1984312100016135.072.782584235842337800
    1985322200016822.512.668587035870339600
    1986332300017321.822.591596035960342000
    1987342400018426.512.436584665846643800
    1988352500019334.042.322580435804345000
    1989362500020099.552.233558325583248000
    1990372500021027.982.135533675336751300
    1991382700021811.602.058556665566653400
    1992392900022935.421.957567575675755500
    1993403000023132.671.940582145821457600
    1994413600023753.531.890680316803160600
    1995423700024705.661.817672266722661200
    1996433800025913.901.732658246582462700
    1997443900027426.001.637638316383165400
    1998454000028861.441.555622126221268400
    1999464100030469.841.473604016040172600
    2000474200032154.821.396586325863276200
    2001484000032921.921.363545395453980400
    2002494000033252.091.350539975399784900
    2003504000034064.951.318527095270987000
    2004514300035648.551.259541455414587900
    2005524500036952.941.215546635466390000
    2006534600038651.411.161534235342394200
    2007544800040405.481.111533255332597500
    2008555000041334.971.0865429854298102000
    2009564400040711.611.1034851448514106800
    2010574400041673.831.0774739447394106800
    2011584600042971.611.0454805248052106800
    2012594800044321.671.0134861448614110100
    2013604500044888.1614500045000113700
    2014614500044888.1614500045000117000
    201562-44888.161  118500
      *age 60 is the indexing year  Divide Sum of Column G top 35 values by 420 months to determine AIME1,919,040 
         AIME =$4,569 / month 

    Step 2 - Use Your AIME to Calculate Your Primary Insurance Amount (PIA)

    Once you have calculated your Average Indexed Monthly Earnings (AIME), you 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 this, the formula has 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 2015 bend points. It works like this:

    • You take 90% of the first $826 of AIME.
    • You take 32% of the next $4,980 of AIME.
    • You take 15% of any amount over that $4,980.
    • 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, 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. Some of this is covered in the next step.)

    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 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 year's bend points to develop a pretty accurate approximation.

    In the example in the table at the bottom of this page you can see how the AIME number (calculated in the previous step) was plugged into the bend point formula to calculate the PIA.

    Using AIME to Calculate your Primary Insurance Amount (PIA) -  Tax Year 2015
    Example using AIME of $4569 / monthTaxable Wage AmountMultiplierSolved
    Bend 1 (up to $826)826.90743.40
    Bend 2 ($4569 - $826)3743.321197.76
    ExcessN/A.150
        
    Sum  1941.20
    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 will 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 year’s 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 website.
      ***Note: this is not the same adjustment that is used to index wages for inflation.

      Word of caution: the biggest reason people get the wrong answer when they run their own calculations on when to begin Social Security is because they take the numbers off their 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 that 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 to begin benefits.

        Of course, another complex formula is used to determine how much more. An explanation is below and a table shows you an example of how it works.

        Social Security Age Adjustments Start With Your PIA

        The formula starts by using your Primary Insurance Amount (PIA) calculated in the previous step. This is the amount you will get if you start benefits are your Full Retirement Age (FRA). Your FRA can vary depending on the year you were born. For people born between 1943 and 1954, your FRA is age 66.

        **Note if you were born on Jan. 1, your FRA will be 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 benefits after your FRA.

        Reduction formula if you begin benefits before your FRA

        • 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 formula is changed to a reduction of 5/12 of 1%.

        Result:

        • 25% reduction: If your FRA is age 66, this means your benefits will be reduced by 25% if you begin taking them at age 62.

          Credit for taking benefit later than FRA

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

          Result:

          • 32% increase: If your FRA is 66, this means your benefits will be increased by 32% by waiting until age 70 to begin.

          How Inflation Impacts Your PIA

          Your PIA is calculated at your age 62. If you wait until beyond age 62, for each year beyond age 62 additional cost of living adjustments will be applied to your PIA. The potential increases based on a 2% inflation rate are shown in the example below on the right side in the "PIA in Future $'s @ 2%" column. The reduced or increased benefit amounts for different ages are shown on the left in the "PIA in Today's Dollars" column.

          If you have already had most of your 35 years of earnings, and you are near 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cost of living adjustments. Many do not account for this when doing their own calculations and this makes them think taking Social Security early is a better deal, when in the majority of cases (but not all), waiting is the better deal.

          Effects of Claiming Age -  Example person born in 1953 = Full Retirement Age at 66
           PIA in Today's Dollars   PIA in Future $'s @ 2% 
          EffectAmount per MonthYearAge # Years from NowAmount
          N/AN/A201360 -2N/A
          N/AN/A201461 -1N/A
          Less$1455.99201562 0$1456
          Less$1553.06201663 +1$1584
          Less$1682.48201764 +2$1750
          Less$1811.90201865 +3$1923
          PIA$1941.32201966 +4$2101
          More$2096.63202067 +5$2315
          More$2264.36202168 +6$2550
          More$2445.50202269 +7$2809