May 28, 2024
Social Security retirement benefits are earned benefits. You contribute your whole career to the collective pot, and when you retire, you can count on an income based on how much you paid into the system.
Generally, these checks amount to about 40% of your pre-retirement earnings.
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While this 40% rule lets you make an educated guess about the size of your future check, there's actually a specific formula you can use to calculate your payments. And if you understand it, you can predict your future benefits with an income of $35,000, $50,000, $80,000 — or whatever amount you happen to earn. Here’s how it works.
How does Social Security's benefits formula work?
Over your career, the SSA records your earnings, up to an annual “wage base limit.” In 2024, that limit is $168,600, which means you get credit for (and pay taxes on) up to $168,800 in income.
From there, your career earnings are adjusted for inflation, and in reviewing your annual income over at least 35 years, the SSA selects the years with your highest indexed earnings, adds them up and then divides that total sum by the number of months in those years. (For 35 years, that’d be 420 months.) Rounded up to the next dollar, that formula should give you your Average Indexed Monthly Earnings (AIME).
If you made $1,000,000 over your career, your AIME would be $2,380.
The SSA uses your AIME to help calculate a portion of your benefits, based on “bend points” set by the administration on an annual basis, along with the year you were born and when you started claiming your retirement benefits (usually 62 for most retirees.)
For example, if you were born in 1958 and turned 62 in 2020, the first bend point is $960 and the second is $5,785. As a result, your primary insurance amount (standard retirement benefit) would equal:
- 90% of the first $960 of your AIME
- 32% of your AIME between $960 and $5,785
- 15% of your AIME above $5,785
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What will your benefits be with a salary of $35K, $50K, or $80K?
Since this formula can be complicated, it helps to look at some real-world examples.
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In reality, most people's salaries change over time even after accounting for inflation. But, for our purposes, let's assume three workers earned pretty steady incomes of $35,000, $50,000, and $80,000 over their careers. With that in mind, here are their AIMEs:
- Worker A’s $35,000 salary over 35 years amounts to career earnings of $1.225 million. After dividing by 420 months of earnings, their AIME is $2,916
- Worker B, on the other hand with a $50,000 income, earned $1.75 million and an AIME of $4,166
- Worker C’s salary of $85,000 over 35 years provided them with $2.975 million in earnings and an AIME of $7,083
Now, you must apply the bend points:
- Worker A with an AIME of $2,916 will receive 90% up to $960 ($864) and 32% of their AIME between $960 and $5,785 ($625.90). In total, their benefit should amount to $1,489.90
- Worker B with an AIME of $4,166 will receive 90% up to $960 ($864) and 32% of their AIME between $960 and $5,785 ($1,025.90). In total, their benefit should amount to $1,889.90
- Worker C with an AIME of $7,083 will receive 90% up to $960 ($864) and 32% of their AIME between $960 and $5,785 ($1,544). This is the only of three recipients whose AIME exceeded $5,785 so they’ll also receive 15% of that income ($194.70). In total, their benefit should amount to $2,602.70
These calculations determine your primary insurance amount. That's available if you claim benefits at full retirement age (FRA). Your birth year determines FRA, and early filing penalties reduce your benefits if you apply before it while delayed retirement credits increase your benefits if you apply after.
So if you were born in February 1958, your FRA would be 66 years and 8 months old. You'd hit that milestone this year and could retire with your standard benefit in 2024. If you made $35,000, you'd have $1,489.90 per month to spend.
If this all seems complicated, the good news is, Social Security has calculators to help you estimate benefits. Or, signing into your Social Security account provides you with a personalized estimate. Use these resources to see what Social Security can do for you — information is power when it comes to planning for retirement.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
