Calculating Your Social Security Benefits

When figuring anticipated retirement income, the maximum Social Security benefit a worker retiring at full retirement age can expect to receive in 2014 is $2,642 per month. (Social Security amounts are subject to 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. In fact, the average monthly Social Security benefit for all retired workers in 2014 is estimated to be only $1,294.

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 reach your full retirement age and continue to work, Social Security taxes continue to be taken out of your pay and your benefits are reduced as follows:

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? The SSA keeps track of your earnings history under the system. The SSA used to provide an annual statement that estimated your future Social Security benefits based upon your earning history. These comprehensive statements are no longer issued. Instead, you can get an "estimate" of your probable benefits by visiting the SSA website and use their online line Retirement Estimator.

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.