Calculating Your Social Security Benefits in 6 Easy Steps
Social Security is an essential insurance program for later in life, providing supplemental income to millions of Americans. In this article, we'll walk you through the process of estimating your Social Security benefits using your personal work history and inflation adjustments.
- Verify your work and earnings record. Social Security benefits are based on your lifetime earnings, specifically the 35 highest-earning years you have worked. To qualify for benefits, you must be at least 62 years old and have paid into Social Security for 10 years or more.
- Adjust your yearly earnings for inflation using the National Average Wage Index. This indexing updates past earnings to account for wage growth and inflation, making them comparable to current dollars. The Social Security Administration (SSA) indexes these earnings only up to age 60 to calculate your benefits.
- Calculate your Average Indexed Monthly Earnings (AIME). Sum your 35 highest years of indexed earnings, then divide by 420 months (35 years × 12 months). If you have fewer than 35 years, zeros are added for the missing years, which lowers your average.
- Apply the bend points formula to your AIME to determine your Primary Insurance Amount (PIA). This formula uses thresholds ("bend points") to apply different replacement rates to portions of your AIME:
- 90% of the first ~$1,226 of AIME
- 32% of AIME between ~$1,226 and ~$7,391
- 15% of AIME exceeding ~$7,391
The resulting PIA represents your monthly benefit at full retirement age (FRA), currently age 67 for people born after 1960. These bend points and thresholds are adjusted yearly with wage growth.
- Consider the age at which you claim benefits. Claiming benefits before your FRA (as early as 62) will reduce your monthly amount, while delaying until age 70 increases it due to delayed retirement credits.
- Use official SSA tools or forms like Form SSA-7004 to get estimates based on your actual earnings history, but understanding the above helps verify these estimates.
Additional points:
- The minimum Social Security benefit calculation applies for low-income individuals with many years of coverage, using years of coverage instead of earnings to boost benefits.
- Inflation adjustments are crucial to fairly compare early-career wages to current standards to calculate an equitable benefit.
In 2025, your PIA (Primary Insurance Amount) will be calculated as follows: 90% of the first $1,226 of your AIME, plus 32% of any amount over $1,226 up to $7,391, plus 15% of any amount over $7,391.
It's important to note that Social Security is projected to become insolvent in 2033, which could lead to a forced reduction in benefits unless the government steps up and addresses the issue.
For more information on Social Security, including strategies to optimize your benefits, when to apply for Social Security, and reasons to take Social Security early (and to wait), check out "Social Security Turns 90, When to Apply for Social Security, Strategies to Optimize Your Social Security Benefits, and Five Reasons to Take Social Security Early (and Four Reasons to Wait)".
Remember, Social Security continues to be the core of the U.S. retirement system, providing supplemental income to beneficiaries for the rest of their lives. In 2025, you only pay Social Security taxes on the first $176,100 you earn.
- To maximize your personal-finance gains from Social Security, it's crucial to understand when to claim benefits, as claiming early reduces your monthly amount, while delaying until age 70 increases it due to delayed retirement credits.
- When estimating your Social Security benefits, don't forget to adjust your yearly earnings for inflation using the National Average Wage Index, which is essential for a fair comparison of early-career wages to current standards and calculating an equitable benefit for your personal-finance future.
