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.
••• 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).

The result: your Average Indexed Monthly Earnings or AIME.

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
From Tax SS Stmt. From S.S.A. Website Age 60 Avg. Wage / Actual Year's Avg. Wage Multiply Year's Actual Wages by Year's Index Factor If more than 35 years avail, take highest 35 Indexed Wages. Not 35 years, enter a 0 for missing years From S.S.A. Website
1971 18 1000 6497.08 6.909 6909 N/A 7800
1972 19 2000 7133.8 6.292 12586 N/A 9000
1973 20 3000 7580.16 5.922 17766 N/A 10800
1974 21 4000 8030.76 5.590 22360 N/A 13200
1975 22 5000 8630.92 5.201 26010 N/A 14100
1976 23 6000 9226.48 4.865 29196 N/A 15300
1977 24 7000 9779.44 4.590 32137 N/A 16500
1978 25 8000 10556.03 4.252 34024 N/A 17700
1979 26 9000 11479.46 3.910 35199 N/A 22900
1980 27 10000 12513.46 3.587 35872 35872 25900
1981 28 11000 13773.10 3.259 35850 35850 29700
1982 29 18000 14531.34 3.089 55603 55603 32400
1983 30 20000 15239.24 2.946 58911 58911 35700
1984 31 21000 16135.07 2.782 58423 58423 37800
1985 32 22000 16822.51 2.668 58703 58703 39600
1986 33 23000 17321.82 2.591 59603 59603 42000
1987 34 24000 18426.51 2.436 58466 58466 43800
1988 35 25000 19334.04 2.322 58043 58043 45000
1989 36 25000 20099.55 2.233 55832 55832 48000
1990 37 25000 21027.98 2.135 53367 53367 51300
1991 38 27000 21811.60 2.058 55666 55666 53400
1992 39 29000 22935.42 1.957 56757 56757 55500
1993 40 30000 23132.67 1.940 58214 58214 57600
1994 41 36000 23753.53 1.890 68031 68031 60600
1995 42 37000 24705.66 1.817 67226 67226 61200
1996 43 38000 25913.90 1.732 65824 65824 62700
1997 44 39000 27426.00 1.637 63831 63831 65400
1998 45 40000 28861.44 1.555 62212 62212 68400
1999 46 41000 30469.84 1.473 60401 60401 72600
2000 47 42000 32154.82 1.396 58632 58632 76200
2001 48 40000 32921.92 1.363 54539 54539 80400
2002 49 40000 33252.09 1.350 53997 53997 84900
2003 50 40000 34064.95 1.318 52709 52709 87000
2004 51 43000 35648.55 1.259 54145 54145 87900
2005 52 45000 36952.94 1.215 54663 54663 90000
2006 53 46000 38651.41 1.161 53423 53423 94200
2007 54 48000 40405.48 1.111 53325 53325 97500
2008 55 50000 41334.97 1.086 54298 54298 102000
2009 56 44000 40711.61 1.103 48514 48514 106800
2010 57 44000 41673.83 1.077 47394 47394 106800
2011 58 46000 42971.61 1.045 48052 48052 106800
2012 59 48000 44321.67 1.013 48614 48614 110100
2013 60 45000 44888.16 1 45000 45000 113700
2014 61 45000 44888.16 1 45000 45000 117000
2015 62 - 44888.16 1 118500
*age 60 is the indexing year Divide Sum of Column G top 35 values by 420 months to determine AIME 1,919,040
AIME = $4,569 / month
How to Calculate Your AIME for Social Security Benefits

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.

Example using AIME of $4569 / month Taxable Wage Amount Multiplier Solved
Bend 1 (up to $826) 826 .90 743.40
Bend 2 ($4569 - $826) 3743 .32 1197.76
Excess N/A .15 0
Sum 1941.20
PIA After Rounding (down to nearest dime and dollar) $1,941
Benefit at Full Retirement Age (FRA) $1,941
Using AIME to Calculate your Primary Insurance Amount (PIA) -  Tax Year 2015

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.

    PIA in Today's Dollars PIA in Future $'s @ 2%
    Effect Amount per Month Year Age # Years from Now Amount
    N/A N/A 2013 60 -2 N/A
    N/A N/A 2014 61 -1 N/A
    Less $1455.99 2015 62 0 $1456
    Less $1553.06 2016 63 +1 $1584
    Less $1682.48 2017 64 +2 $1750
    Less $1811.90 2018 65 +3 $1923
    PIA $1941.32 2019 66 +4 $2101
    More $2096.63 2020 67 +5 $2315
    More $2264.36 2021 68 +6 $2550
    More $2445.50 2022 69 +7 $2809
    Effects of Claiming Age -  Example person born in 1953 = Full Retirement Age at 66