Contributed by: Matt Trujillo, CFP®
When Social Security is concerned, you may find yourself wondering: “How is my benefit calculated?”
To help you understand, I’ve laid out the 7 steps it takes to calculate your Social Security benefit:
Step 1: Enter earnings from each year into the chart below into Column B. Only enter earnings up to the “maximum earnings” figure from column A. So for instance in 2001 if you earned $200,000 you would only enter $80,400 into column B because that is the maximum credit you can earn for that year. All earnings after $80,400 didn’t pay into social security for that year. For the years you didn’t have earnings or didn’t pay into social security enter $0 into Column B.
Step 2: Multiply the amounts in Column B by the index factors in Column C and enter the total in Column D. This gives you an estimated value of your past earnings in current dollars.
Step 3: From Column D, pick 35 years with the highest amounts and add these amounts together.
Step 4: Divide the total from Step 3 by 420 (this is the number of months in 35 years); be sure to round down to the nearest whole dollar figure with whatever total you come up with. This figure is your average indexed monthly earnings
Step 5: Multiply the first $856 from Step 4 by .90; from $857 to $5,157 multiply by .32; and from $5,158 and up multiple by .15
This is probably the most confusing part so let me give an example:
Step 4 average indexed monthly earnings = $8,000;
$856 * .9 = $770.40
$5,157-$857= $4,300 * .32 = $1,376
$8,000-$5,157= $2,843 * .15 = $426.45
Step 6: Add all the figures up from Step 5 and round down; if we use our previous example this would be $770.40 + $1,376 + $426.45 = $2,572.85 rounded down would be $2,572.
Step 7: Multiply the amount in Step 6 by 75%. Whatever figure you get is your estimated monthly retirement benefit if you retire at age 62.
I hope you find these 7 steps useful and easy to navigate. When it comes to retirement planning and Social Security benefits, if you have questions or concerns any of the planners here at The Center are willing and able to help you!
Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.