Source: Wikimedia Commons.
The size of your monthly Social Security check when you retire
will depend largely on how much you earned and how much you paid
in Social Security tax during your working years.
It's not as simple as getting your money back, however. The
IRS uses special formulas and rules to determine how much you
receive in benefits. The maximum amount that you can receive per
month if you retire at full retirement age in 2014 is
$2,642, but your actual benefits will vary depending on several
Because of the way your benefits are determined, you can't
assume that the more you earn, the more you will receive in
benefits. Here's how it works.
What factors affect Social Security benefits?
The biggest factor in how much you will receive in Social
Security benefits is how much you earned while you were working.
For Social Security purposes, what matters is the average amount
you earned during your highest-earning 35 years before age 62,
adjusted for cost-of-living increases.
The age at which you start taking benefits also affects how
much you receive per month once you start. The longer you wait to
start taking benefits, up to age 70, the higher your monthly
benefits once you start.
If you have earned income in the same year you receive
benefits and you either have not reached full retirement age or
reached full retirement age that year, your Social Security
benefits may be reduced.
Your benefits may also be affected by different types of
earnings, and a pension received from a job in which you did not
pay Social Security taxes will reduce your benefit.
What factors do
affect Social Security benefits?
Working longer doesn't necessarily mean you get more Social
Security benefits. Only your 35 highest-earning years count, so
continuing to work won't boost your benefits unless it increases
your average income for the highest-earnings years.
Working fewer hours or for less pay as you near retirement
won't hurt your Social Security benefits. Some people mistakenly
assume that Social Security benefits are based on the last years
worked. Fortunately, you can work as long as you want, and your
Social Security benefits are still based on your 35
Do you qualify for Social Security benefits?
Not everyone who pays into the Social Security system qualifies
to receive retirement benefits. To receive Social Security
benefits on your record, you must have at least 40 credits. You
generally earn four credits per year that you work. In 2014, you
receive one credit for each $1,200 you earn, up to four credits
If you don't qualify for benefits under your own record, you
may be able to claim benefits under the record of your spouse or
Step by step: How are Social Security benefits
If you qualify for Social Security benefits, here's how the SSA
determines the amount of your monthly check.
1. Total earnings:
The SSA determines the total amount you earned in the 35 years
during which you made the most money, up to a maximum amount per
year. The limit is adjusted for inflation -- in 1951, the limit
was $3,600. In 2013, it was $113,700.
If you worked fewer than 35 years, the missing years are
counted as zero. For example, say you worked 20 years. For
calculating your highest earning years, the SSA takes all 20 of
the years you worked and factors in 15 years at zero pay.
The amounts you actually earned are also multiplied by an
index factor for each year in order to account for inflation.
2. Average indexed monthly earnings:
The amount from Step 1 is divided by 420 months (35 years) and
rounded down to the nearest dollar to find your average indexed
monthly earnings (
3. Benefit at full retirement age (the age at which you
can take full benefits):
Your benefit is based on a three-tiered percentage of your
average indexed monthly earnings. For 2014, the benefit is
calculated as follows:
(90% of your first $816 of AIME) + (32% of AIME above
$816 and through $4,917) + (15% of AIME above $4,917)
The sum is your estimated monthly retirement benefit at your
full retirement age (2011 calculations).
If your AIME is $5,000, your benefit is calculated as
90% x $816 = $734.40
+ 32% x ($4,917 - $816) = $1,312.32
+ 15% x ($5,000 AIME - $4,917) = $12.45
Total monthly benefit = $2,059.17
Full retirement age ranges from 65 to 67 and depends on the
year in which you were born. If you were born between 1943 and
1954, your full retirement age is 66.
4. Benefit if you retire early:
If you want to retire early and take Social Security benefits
before full retirement age, your monthly benefit is reduced. If
your full retirement age is 67 and you want to retire at age 62,
for example, then multiply the result from Step 3 by 75%.
5. Reductions for earned income while receiving
If you are under your full retirement age and working, you can
still receive early Social Security benefits. However, for every
$2 you earn above the annual limit, your benefits are reduced by
$1. This annual limit in 2014 is $15,480.
In the year you reach full retirement age, before the month in
which you reach that age, you can earn up to a certain limit
before the SSA deducts $1 for every $3 you earn. In 2014, that
limit is $41,400.
After you reach your full retirement age, you can work as much
as you want without worrying about your Social Security
Social Security benefits can be an important part of your
retirement plan. Knowing how your benefits are calculated can
help you understand how much you can expect to receive -- and
help you maximize your benefits for retirement.
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How Are Social Security Benefits Calculated?
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