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Social Security benefits have always been a crucial part of retirement planning, and Americans rely on their monthly benefit check as a key source of income during their retirement years. According to the National Academy of Social Insurance, Social Security is the sole source of income for roughly 20 percent of Americans aged 65 and older, while more than 80 percent of people in this age group receive Social Security benefit checks each month.
Experts often say that a retirement plan is like a three-legged stool, with the legs of the stool being Social Security, employer-sponsored retirement benefits and personal savings. Considering how important Social Security is for retirees, it’s vital to know exactly how your benefit will be calculated.
How Social Security benefits are calculated
Social Security has two main criteria for whether you earn retirement benefits and how much they are if you do qualify:
- You must earn a minimum number of credits to even qualify for retirement benefits.
- Your retirement benefits depend on how much you’ve paid into the system over your 35 highest-earning years.
Here’s how each of these elements is calculated by Social Security. (This Bankrate calculator can help estimate your Social Security check.)
How to earn Social Security credits
In order to qualify for Social Security benefits, you need to accrue 40 credits, if you were born after Jan. 2, 1929. To earn one credit in 2024, you must have wages and self-employment income of $1,730. You may earn up to four credits per calendar year. In a single year, you must earn $6,920 to get the full four credits, and you have the full year to earn that much, though you can earn it in any period of that tax year. So to earn 40 credits, you’ll need to meet the minimum wage or self-employment income in at least 10 years, though they need not be consecutive.
And don’t sweat it if you’re self-employed and run your own business.
“If you are self-employed, you earn Social Security credits the same way employees do,” says certified financial planner Alexey Bulankov, private client advisor, East West Bank.
Once you earn the 40 credits, earning more credits won’t increase your benefit payment. Instead, your retirement benefit is based on how much you earned during your working years.
The not-so-secret formula to calculating Social Security benefits
The amount you would receive at your full retirement age, which ranges from age 65 to 67, depending on the year you were born, is called the primary insurance amount, or PIA. (Here’s the average Social Security check.)
The formula for calculating your PIA is based on the average indexed monthly earnings, or AIME, in your 35 highest-earning years after age 21, up to the Social Security wage base. In 2025, the base is $176,100, an increase of $7,500 from last year. The wage base is the maximum amount of income on which Social Security taxes must be paid.
Employees must pay 6.2 percent up to that income level, while employers kick in another 6.2 percent. If you’re self-employed, you pay both portions of this payroll tax to fund Social Security.
“If a person works (fewer) than 35 years, missing years are filled in with zeros. If they have worked more than 35 years, only the highest-earning years will be considered,” says Charles C. Scott, founder and president of Pelleton Capital Management, in Scottsdale, Arizona.
Earnings from a worker’s 35 highest-earning years are tallied and indexed for inflation, resulting in the AIME, Bulankov says.
The AIME is “divided into three segments, called bend points (which are adjusted each year for inflation), giving you the worker’s PIA,” says Scott.
Here are the bend points for calculating a worker’s benefits in 2024. The benefit is the sum of the following elements:
- 90 percent of the first $1,226 of averaged indexed monthly earnings
- 32 percent of earnings between $1,226 and $7,391
- 15 percent of earnings above $7,391
For example, a 62-year-old born in 1962 whose total indexed earnings over her 35 highest-earning years were $2.5 million would have an AIME of $5,952.38 ($2,500,000 / 420 work months = $5,952.38).
- The first bend point, $1,226 of the AIME, is multiplied by 90 percent, resulting in $1,103.40.
- This worker then earned an incremental $4,726.38 (or $5,952.38 minus $1,226). This figure is multiplied by 32 percent, resulting in $1,512.44.
- The worker had no earnings above $7,078, so there’s no benefit at this level.
Add those figures up, and they come to $2,615.84.
Benefit amounts are rounded down to the next-lowest dime, so this worker’s PIA, which is the amount she would receive if she waits until her full retirement age (67 years) to collect Social Security, is $2,615.80. However, if this retiree opts to retire early, this amount can decline by as much as 30 percent – so it’s vital to understand the best age to take benefits.
Bend points and formulas are set annually by the Social Security Administration.
When to start taking Social Security benefits
Certain factors can change the amount to which you are entitled, such as electing to receive benefits before full retirement age or delaying benefits past your full retirement age. Government workers receiving pension benefits may not be eligible to receive Social Security.
You can file for benefits as early as age 62, but you’ll receive a reduced benefit if you claim benefits before full retirement age. If you wait until after full retirement, your monthly benefit check will increase, up to age 70.
“Claiming Social Security early results in a permanent pay cut from what your benefit would be at full retirement age,” warns Greg McBride, CFA, Bankrate chief financial analyst.
“Better still is that each year you delay Social Security after your full retirement age and up until age 70 results in an 8 percent increase — a permanent pay raise, if you will, above the benefit you’d have received at full retirement age,” McBride says.
Bottom line
Calculating your Social Security check can be complicated, but understanding how your benefit is determined can help you plan for retirement. The Social Security retirement estimator can help you figure your benefits. And you can receive a full accounting of your earnings if you go to the Social Security website, set up an account and review your personal statement.
– Bankrate’s Rachel Christian contributed to an update of this article. Libby Wells and Georgina Tzanetos contributed to a previous version of this article.
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