Calculating Your Social Security Benefits

When figuring anticipated retirement income, the maximum Social Security benefit a retiring worker can expect to receive in 2008 is $2,185 per month ($2,116 per month in 2007). This amount is increased regularly by a cost of living adjustment (COLA). The actual amount of Social Security benefits you receive, however, is usually lower due to a number of factors.

One factor is your average earnings over the course of your life. The Social Security Administration (SSA) will average your 35 highest years of earnings to initially determine your benefit amount. The higher your earnings, the more you get. If you do not have 35 years worth of earnings, years with zero earnings will be substituted and lower your average yearly earnings.

Another important factor that determines the amount of your monthly Social Security benefits is your age at the time you apply for benefits. For example, you can start your Social Security retirement benefits as early as age 62, but the SSA will reduce your benefits by 20 to 30 percent. Benefits continue to be decreased up to the full retirement age. The chart below indicates the age at which full benefits will be provided.

As with any major decision in life, choosing to claim Social Security benefits at either age 62 or 65 is a gamble. In considering your options, there is usually a break-even point that marks the point at which one retirement age is better than the other.

Example Let's assume that any Social Security money you get can earn an 8 percent investment rate of return and is subject to a 3 percent inflation rate. A person who retires at 65 will have to collect benefits for 12 years before being better off than the early retiree. A person who retires at 67 will go over their break-even point after 14 years. So, if you know that you have a short time to live at age 62, it is probably a good idea to start claiming Social Security benefits right away. Unfortunately (or fortunately depending on your point of view), we seldom have that much certainty when planning for retirement.

If you delay claiming benefits beyond your full retirement age, the SSA rewards you with a yearly increase in benefits as shown in the chart below. The increases continue until you reach age 70.

Tip If you decide to delay your retirement, be sure to sign up for Medicare at age 65. Your medical insurance costs may be more if you delay applying for it.

If you start to claim benefits before you reached your full retirement age and continued to work, Social Security taxes continue to be taken out of your pay and your benefits are reduced as follows:

• If you are under full retirement age when you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2008, that limit is $13,560 ($12,960 in 2007).
• In the year you turn full retirement age, $1 in benefits will be deducted for each $3 you earn above a different limit, but only counting earnings before the month you reach the full benefit retirement age. If you reach full retirement age during 2008, the limit on your earnings for months before age 65 is $3,010 per month ($36,120 per year). For 2007, the limit was $2,870 per month ($34,440 per year).
• Starting with the month you reach full retirement age, you will get your benefits with no limit on your earnings.

Tip Your Social Security benefits will not be decreased by the amount of employer provided pensions you receive if you paid Social Security taxes at the place you worked. On the other hand, pensions based on work that is not covered by Social Security (like the federal civil service and some state, local, or foreign government systems) will probably reduce the amount of Social Security benefits you receive.

So how much will you get? Fortunately, the SSA keeps track of your earnings history under the system and can provide you with a Social Security Statement. This valuable document estimates your future Social Security benefits and tells you how to qualify for those benefits. Starting with your 25th birthday, the SSA will automatically send you a Social Security Statement three months before each birthday. You can also visit the SSA website and request a statement on the Internet or download a request and mail it to the address on the form.

Financial Calculators If you just can't wait that long, use this Social Security Benefits Calculator to help you explore your potential benefit amounts using different retirement dates and different levels of potential future earnings. Please note that the estimates you get may differ from your official Social Security statement if the assumptions you use are different.