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Ask the Retirement Expert: How Is My Social Security Benefit Calculated?

February 5, 2016

Each week our Northwestern Mutual retirement experts answer your questions. This week’s question:

How is my Social Security benefit calculated?

Perhaps this isn’t surprising, but it’s complicated.

First, you have to have worked for at least 10 years (it doesn’t have to be consecutive, just total). Then your benefits are based on how much money you made during your highest-paid 35 years of work. (If you didn’t work for 35 years, 0 is entered for each year there are no earnings.) Your earnings are adjusted for inflation and then used to calculate something Social Security refers to as the Average Indexed Monthly Earning (AIME).

That number is then applied to a formula that’s used to calculate your Primary Insurance Amount (PIA). Your PIA is what you’ll receive from Social Security.

In 2016, your PIA is calculated as follows: You get 90 percent of the first \$856 of your AIME. Then you get 32 percent of the next \$4,301. After that you get 15 percent of additional AIME until your benefit reaches \$2,689 per month at full retirement age (FRA). See more from the Social Security Administration here.

Let’s say you had an AIME of \$6,000. This means you would get 90 percent of \$856 or \$770.40 per month (\$856 x .9). On the next \$4,301 you would get \$1,376.32 monthly (\$4,301 x .32). The remaining \$843 (\$6,000 - \$856 - \$4,301) of your AIME would result in a \$126.45 monthly benefit (843 x .15). That results in a monthly benefit of \$2273.17 at FRA.

To complicate things a little more, your benefit can change based on when you claim. You can claim prior to your FRA (as early as when you turn 62). But that will reduce your benefit for each year you claim prior to FRA. You can also increase your benefit by 8 percent per year after your FRA up to age 70.