How Does Social Security Arrive at your Monthly Benefit?
By Shane Flait © 2008

Your Social Security benefit (monthly income) - whenever you choose to begin receiving Social security - is based on what your benefit would be if you started to receive it at your Full Retirement Age (FRA). I’ll call that your FRA SS benefit. Your FRA used to be 65 years old for everyone. The FRA is being adjusted slightly upward to help keep the system solvent in coming years.

The table shows how your FRA increases as your date of birth gets later – i.e. the younger you are.

Birth Year	Full Retirement Age
1937 or earlier	65
1938	65 and 2 months
1939	65 and 4 months
1940	65 and 6 months
1941	65 and 8 months
1942	65 and 10 months
1943-1954	66

 

 

 

 

Beginning your Social Security before your FRA permanently reduces your benefits. You’ll get only a fraction of your FRA benefit that decreases the earlier you begin. The earliest you can begin is when you turn 62 years old.  Your benefits are roughly 30% less at age 62 than your FRA SS benefit.

Waiting beyond your FRA before beginning Social Security benefits will increase your benefit each year until your reach 70 years old. Benefits increase roughly 5% per year beyond your FRA. There’s no increase of benefits for waiting longer than age 70.

Full Retirement Age Benefit Calculation
Suppose you turn 62 in 2007, then you were born in 1945. According to the table your FRA is 66.  Here's how the Social Security Administration[1] calculates your benefit at your full retirement age (your FRA SS benefit) in 2007:

1. It determines the number of years of your earnings to use as a base. If you were born after 1928, that base number is your 35 highest years of earnings
2. It then adjusts those earnings for wage inflation. This is called "indexing."  
3. It determines your average adjusted monthly earnings based on the number of years in step 1. (If you don't have earnings in 35 different years, some years with $0 earnings will be used to figure this average amount!)
4. It then multiplies your average adjusted monthly earnings by percentages in a formula that is set out by law. If you turn 62 in 2007, that formula adds together as:
   • 90 percent of your first $680 of average monthly earnings,
   • 32 percent of the amount between $680 and $4,100, and
   • 15 percent of everything over $4,100 to give you your full retirement benefit amount.

As an example, suppose your average annual income for your highest earning 35 year, after indexing, is $48,000. This corresponds to a monthly income of $4,000. Now apply the formula as:

90% of $680 = $612

32% of ($4000-$680) = $1062.40

15% of ($0) = $0

Adding these up gives you your monthly Social Security Benefit (income) is 

$1674.40 = $612 + $1062.40 + $0

Social Security will pay a maximum benefit for 2007 of $2116 per month if you start receiving it at your full retirement age (FRA). This corresponds to an average month income of about $6800 ($81,600 annual average). 

Be aware that Social Security benefits have a cost of living adjustment yearly.

How will working while collecting Social Security benefit affect my benefits?
This will also reduce your benefits but only while you’re collecting under your FRA. Then your benefits will be reduced only if you earn above a threshold income amount.

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com