Feb 2, 2024
Social Security benefits will likely play an important part in your retirement income. After all, nearly nine out of 10 people aged 65 and older were receiving benefits as of June 30, 2023.
According to research released in 2021 by the Social Security Administration (SSA), these benefits account for about 30% of the income of people over 65.
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As Social Security could contribute significantly to your income, it helps to know as you plan how much your benefits will change over time.
Average benefits now and in the future
The estimated average monthly benefit for all retired workers in January 2024 was $1,907. Using 2000-2024 estimates, the annual hike in the average monthly benefit of all retired-worker beneficiaries was 3.53%. At this pace, the benefit could jump 23% to $2,348 by January 2030.
These aggregate numbers, while informative, should serve as only a rough guide. Your monthly benefits can vary significantly based on when you start to collect and how much you earned during your working years. If you’re looking for a more personalized estimate of your expected monthly benefit, use the Social Security Online Quick Benefit Calculator.
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How benefits are calculated
Your monthly Social Security benefit is calculated by applying a formula to your average indexed monthly earnings (AIME) to determine your primary insurance amount (PIA). Indexing means simply that the government is making sure your future benefits reflect the general rise in the standard of living during your working lifetime. Your AIME sums your 35 years of highest earnings (or fewer if you worked less than 35 years), indexes them to factor in wage growth, and then produces an average monthly figure.
This figure gets adjusted up or down depending on whether you retire before, after, or at your normal retirement age (NRA), which varies from 65 to 67, depending on your birth year. Once you start receiving benefits, they will change annually based on a cost of living adjustment (COLA), which reflects changes in the consumer price index (CPI). This is how your benefit keeps pace with inflation.
Your PIA is derived by summing three different portions of your AIME. In 2024, the PIA is the sum of:
- 90% of the first $1,174 of your AIME;
- 32% of your AIME over $1,174 through $7,078; and
- 15% of your AIME over $7,078.
The percentages are fixed by law, but the “bend points” ($1,174 and $7,078) change every year based on the national average wage index.
It matters when you retire
If you choose to collect retirement benefits before you reach your NRA, you can do so as early as age 62, but your benefit will be reduced from your PIA, depending on how early you start. For example, starting your benefits at age 62 in 2024 means a 30% reduction from your PIA, compared to waiting until your NRA. Similarly, the benefits will rise if you retire after your NRA, up until age 69.
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Benefits are adjusted for inflation
The COLA, which averaged 2.6% from 2000 to 2024, is announced every October and takes effect in January of the following year. It reflects the year-over-year change in the consumer price index for urban wage earners and clerical workers (CPI-W). For example, the 3.2% COLA that took effect in January 2024 was announced in October 2023 and is based on the increase in CPI-W between the third quarters of 2022 and 2023.
While Social Security benefits can provide a valuable addition to your retirement income, you’ll still need to build a nest egg to live comfortably. Know how much you can expect from these payments, even as you work them into a comprehensive plan that paves the way for a rich life after work.
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Douglas Warren is a writer specializing in economics, business and finance. His writing is informed by his past work as an institutional portfolio manager, fixed income salesperson, credit analyst and personal financial consultant. He has a master’s degree in economics from Queen’s University and is a CFA® charterholder.
