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How Are Social Security Benefits Calculated? A Few Points & Factors Having Effect On The Benefits
One of the most popular Social Security questions that I hear from baby boomers getting ready to retire is "how are Social Security benefits calculated?" This is an important question as it could affect how long you need to work, whether you should continue to work during your retirement years, or any other aspects of your retirement plan.
First, please note that you receive a Social Security retirement benefit estimate each year in the mail, usually around your birth date. There're also several calculators available on the Social Security website to assist you estimate how much your retirement benefits will be, so you don't need to know how to calculate the benefit yourself.
It's still helpful to know how Social Security is calculated, but, so here are the basics:
Basically, your highest 35 years of earnings are indexed for inflation, then averaged to determine the basis for your monthly benefit. If you worked less than 35 years, the missing years will be calculated as zero for purposes of determining your benefit amount.
Planning suggestion: If you have close to 35 years of earnings and you're close to retirement, you will benefit greatly by continuing to work until you have 35 full years of earnings to include in your benefit calculation. The majority of people it will affect are women who took time off work to raise a family.
The top 35 years of earnings are then divided by 35 to get your average indexed monthly earnings (AIME). A formula is applied to your AIME to determine your primary insurance amount (PIA). We won't go into the specifics of the formula; the important thing to note is that your Primary insurance amount is the full unreduced benefit you would receive if you retired at your full retirement age (at the age of 66 for people born between 1943 and 1954). This amount will be reduced if you take early retirement or increased if you retire after age 66.
The PIA is also the basis for other benefits such as spousal benefits, therefore it's significant to understand that your Primary insurance amount is not necessarily the same amount that you will receive. If you are married and your spouse will be collecting benefits based on your earnings instead of her own, then you might want to maximize your own PIA to maximize the total Social Security benefits you & your spouse will receive.
Social Security Eligibility Criteria: Can A Full-Time Housewife Collect Social Security?
When Social Security was first established, most families only had one bread-earner, and only the working spouse qualified for retirement benefits. This caused financial difficulties for the spouse who didn't work (and therefore didn't qualify for Social Security) if the working spouse passed away first.
Completely New Rules Mean A Lot More Individuals Doing Roth IRA Conversions In 2010
As we near the end of 2010, countless people have already done Roth IRA conversions, and many others are questioning if a Roth IRA conversion in 2010 is the right move for them.
Social Security Benefits: Some Important Information On COLA
For the second year in a row people who rely on Social Security will not be receiving a cost of living increase. This is only the second time since the cost of living adjustment (COLA) was adopted that recipients have not received an increase.
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There are many different types of financial planners. Not only are financial advisors compensated differently, but the services they provide vary quite a bit as well. Here is a quick summary of the different types of financial advisors and how they can help you.
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Social Security Old Age Earnings: Guidelines To Help You Make The Most Of Your Social Security Income
As you get closer to retirement, choosing when to take your Social Security may seem like rolling the dice. There are so many decisions to make, such as: