No one needs more than 40 credits for any Social Security benefit. In this case, the previous 35 top-earning years add up to $4,259,563, so the AIME is calculated to be $10,141. 10 Common Questions About Social Security. Read our, Step 2: Calculate YourPrimary Insurance Amount (PIA). For a pre-retiree, I see Soc Security as having multiple uses to a long term investor. On average, Social Security replaces about 40% of the average workers pre-retirement income. Great article. Cumulative Growth of a $10,000 Investment in Stock Advisor, Join Over Half a 1 Million Premium Members And Get More In-Depth Stock Guidance and Research, Copyright, Trademark and Patent Information. For 2021, the bend points were $996 and $6,002. the bend points (13k/year and 80k/year) are critical for your retirement. If you wait beyond age 62, cost-of-living adjustments (COLAs) will be applied to your PIA for each year afterward. Making the world smarter, happier, and richer. In this scenario, your PIA would equal 41% of your AIME. Those amounts are indexed to the AWI, so they generally increase each year. Then, multiply your historical earnings by every year's corresponding index factor to adjust them into 2016 dollars. At any rate, now that we know these two numbers, we can jump back to 2020s AWI Series figure, which is $55,628.60. With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085. ", Social Security Administration. Then, 5/12, or 0.42, multiplied by the remaining 12 months, is 5% for a total of 25%. Alternatively, you could get there in just 10 years if you earned $43,080 per year. Divide by 420 to get an AIME of $4,569. How Are the Social Security Trust Funds Invested? The book is also available on Kindle, which you can find at this Kindle version link. For example, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 8.7% COLA in 2023; they received 5.9% COLA in 2022, but the COLA was just 1.3% for 2020 and 1.6% for 2019. Bend points are the portions of your average income (Average Indexed Monthly Earnings AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series. Because of how the wage indexing formula works, if you are not yet age 62, your calculation to determine how much Social Security you will get is only an estimate. The latest in our Owners Manual series,A 401(k) Owners Manual, was published in January 2020 and is available onAmazon at this link. "If You Were Born Between 1943 and 1954 Your Full Retirement Age Is 66. For instance, someone with an AIME of $1,500 would receive 67% of their AIME in benefits at full retirement age. Can Your PIA Change After You Reach Age 62? According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2022 bend points is from 2020. Heres how to calculate your benefits so you know how to plan. If youre interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA. Well, you can get a quick estimate simply by taking $5,785 * 420 = $2,467,500 and subtracting my 35 years of indexed wages ($2,012,902) to get $454,598. Keep in mind that the figures for the bend points are slightly lower in this exercise than they are in 2022, but I think it's worth showing you this anyway: As you can see, my AIME at the time was $4,793, so I was still a little bit below the second bend point of $5,875 and a long way away from maxing out my Social Security benefit. Doing the math results in a first bend point for 2019 of 926.22 (rounded to $926). You will be sent a link to the file and a confirmation to receive notifications of new posts. PIA determines the monthly Social Security benefit that will be received in the first year of benefits by a worker who starts benefits at their full retirement age (FRA), which is 66 for individuals born between 1943 and 1954, increases by two months each year for those born after 1954, and reaches 67 for those born in 1960 and thereafter. Bend points from the year you turn 62 are used to calculate your Social Security retirement benefits. There is a three-step process used to calculate the amount of Social Security benefits you will receive. "Full Retirement and Age 62 Benefit by Year of Birth. The worst thing about the basic my social security site is that it didnt make it easy/obvious how to model early retirement (retirement in the sense of no longer having an income, not in terms of taking SS). If you are in your late 50s and approaching retirement, you can create a useful model of your future benefits. Get a 1% yield bump on your first investment in commercial real estate, Earn easy 1099 income with quick surveys for healthcare professionals with InCrowd, Register with All Global Circle and receive a bonus of up to $50, This website uses cookies to improve your experience. Are Social Security Benefits a Form of Socialism? Even for high-income professionals, the target audience of this blog, Social Security will be a significant portion of retirement spending. The Social Security Administration's payment calendar helps recipients plan for payments. A nonworking spouse qualifies for half of the working spouses benefits, so each extra dollar a worker earns can actually be worth 1.5 times the benefits. There are four ways the starting benefit can be permanently increased or reduced from the PIA calculated at age 62: All four points are related to your starting Social Security benefits. Here in the Midwest, getting your ducks in a row implies organization, which is one of the outcomes of having a better understanding of your financial life. WEP Impact Calculation Factors Getting Your Financial Ducks In A Row, Spotlight: Chained CPI Democratic Liberal Umbrella, How is the Maximum Social Security Benefit Calculated? A hands-on guide to running the numbers behind your Social Security. You can learn more about the standards we follow in producing accurate, unbiased content in our. Same for disability. That works out to be about 40% of my age 70 benefit. His calculator is one of the best I have found. Schedule of Social Security Benefit Payments 2022 Benefits paid on Birth date on. In that respect, it doesn't matter if you earned just a little for many years or a lot for a few years (as long as it was at least 10 years). Cost-of-Living Adjustment (COLA) Information., Social Security Administration. Likewise, I could see how long it would take to maximize my Social Security benefit ($4,819,500 $2,012,902 = $2,806,598 / $137,700 = Another 20 years and 16-17 years between that second bend point and the maximum level). Smith Godios Sorensen Inc. 411 Wolf Ledges Parkway, Suite 400, Akron, OH 44311. "Benefit Calculators. You can file whats called a restricted application for just spousal benefits if any of these is true: You were born before Jan. 2, 1954. Click this link for the Amazon ordering page. In addition to this blog, youll find Sterlings writings all around the internet. Use the most recently published bend points to convert your AIME into a PIA. A reduction is applied to your PIA if you begin benefits before your FRA. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. Unfortunately when I asked them for their SSNs, offering to increase their pay so their net remained the same, they quit- I guess they had other benefits from not officially earning anything. The bend. I always worried about the maids I knew of my friends families who continued working long into their senior years, probably since they had no alternative having been paid off the books (and in our town were often the major bread winner for children and grandchildren still). Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services. The latest figures, which reflect how much working households spent on goods and services in August, suggest Social Security benefits could increase over 5% in 2022. It spit this out when I first did this in 2020. If your downloaded file ends in .zip or any other file extension, change it back to .xlsx and youll find that you have a working spreadsheet. You are caring for a child who is under 16 or disabled. Those amounts are indexed to the AWI, so they Financial Wellness and Burnout Prevention for Medical Professionals, 20 Ways You Are Incentivized to Earn Less, 5 Reasons to Not Give Up on Social Security, The Social Security Cost of Living Increase Is the Biggest in Decades. Your earnings history is shown on your Social Security statement, which you can now obtainonline. We use your total yearly earnings to calculate your Social Security credits. The next step is to convert your AIME into a primary insurance amount (PIA) by running it through a calculation called "bend points." A different set of bend points is established each year. Unexplored in this article are opportunities for spouses of high earners to collect their own benefits early and then switch over to half their spouses later, increasing their total benefit amount. For 2022, the SSA established the first bend point as $1,024 and the second bend point as $6,172. Good news! If you pay SS taxes on the Social Security wage limit every year for 35 years, you get zero credit for any additional earnings. Social Security is designed as a "progressive" social insurance system, which means it replaces a greater part of average monthly pay for low-income workers than it does for high-income workers. Bend points are income thresholds that are used to effectively reduce your AIME to the primary insurance amount (PIA) you'll receive from Social Security at full retirement age, or the age at which you can receive 100% of your monthly benefit. $2,592,240/$147,000 = 17.6 years. The second column shows the workers annual earnings that are subject to Social Security payroll tax. "Social Security Benefit Amounts.". Why does it exist? For a full explanation, please see the postSocial Security and Early Retirement 2022: Know Your Bend Points! Those born from the 21st-31st receive payments by the fourth Wednesday. The top spousal benefit is 50 percent of your husbands or wifes primary insurance amount (the retirement benefit he or she is entitled to at full retirement age, which is 66 and 4 months for people born in 1956 and is gradually increasing to 67). In this case, you can claim your own Social Security beginning at 62 and make the switch to spousal benefits when your husband or wife files. Dr. Jim, thank you for always bringing the goods. "Social Security taxes" can refer to taxes paid into the Social Security system or taxes paid on Social Security benefits. Yes, the ones SS sends you assumes youll be working until when you start taking benefits. Those earnings are converted to a monthly insurance payment based on your full retirement age. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Amazon:Author Page. To do that, the formula uses what are called bend points," which are adjusted for inflation each year. Unclassified cookies are cookies that we are in the process of classifying, together with the providers of individual cookies. Jim provides expert guidance for 9 Benefits Calculation Example For Person In the table below, see actual wages of $21,000 for 1984 in Column C. In column D are the average wages according to the National Wage Index. And if youve come here to learn about queuing waterfowl, I apologize for the confusion. Basically, if you are below this bend point and retiring next year, earning an extra $100 a month (and paying 12.4% in SS tax on it) means you (and your employer) are investing $100 * 12 * 12.4% = $148.80 in exchange for an annual benefit of $100*12*90% = $1,080! AARP. https://www.whitecoatinvestor.com/single-income-versus-dual-income-families/, https://www.whitecoatinvestor.com/avoiding-the-second-income-trap-with-a-side-gig-for-the-stay-at-home-spouse/, https://www.whitecoatinvestor.com/whats-different-for-dual-income-couples/. So I believe the full benefit at age 70 would be $73,894 instead of $78,990. Sterlings first book, Lose Weight Save Money, can be purchased by clicking this link. Sterling Raskie, MSFS, CFP, ChFC If one delays claim SSI to 70, ones spouse can only get 50% of one amount at ones FRA not his amount at 70. Notice that the index factor becomes 1.0000 in 2016, the year in which the worker turns 60, and it remains 1.0000 without changing for any future years of taxable earnings. You're going to have to earn millions over your career to get to the second bend point, but if you work a full 35 years, that's just $2,592,240/35 = $74,064 per year, certainly not out of reach for a professional who works a full career. Are Social Security Benefits Inflation-Adjusted? 1% back on all else. I see as the years pass since retirement more accurate readings of future SS benefits- have already lost $900/mo in benefits by not working until 70. Can I file for my Social Security at 62 and switch to spousal benefits later? It was reassuring to see that come to fruition after creeping closer to it each year since 2017. In our example above, the workers benefits were based on 2022 figures, but usually, the SSA adjusts the level of benefits based on the pace of rising prices in the economycalled inflation. In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. ", Social Security Administration. These bend points have been indexed annually over the years, such that for 2022 the bend points are $1,024 and $6,172. For instance, if your AIME is $5,500, the bend point calculation would look like this: .9(895) + .32(5397-895) + .15(103) =$2,262. [], [] these bend points are adjusted by a formula that has been set in law since 1979, are based on wage-growth, and there is absolutely no changes to that formula in the gang of six plan, and the changes [], [] the Average Indexed Monthly Earnings or AIME) of $7,681. If youd prefer, you can download this spreadsheet and others Ive made for home use. ", Social Security Administration. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits. We'll assume you're ok with this, but you can opt-out if you wish. The spouse will qualify for social security on their own but curious how that benefits someone who already earns the 50% benefit from a higher earning spouse. Will it change how much or how long you work? These different tiers, or bend points, are set by law. He was not a doctor although he was a professional, and he did work many years with an income just above the maximum income that was taxed for Social Security. The PIA and family maximum bend points from 1979 on shown in the following chart: To Link to this section - Use this URL: http://policy.ssa.gov/poms.nsf/lnx/0300605900 RS 00605.900 - List of RAW PIA and Family Maximum Computations - 11/10/2022 Batch run: 11/10/2022 11/10/2022 "Social Security Primer." The table above shows only a segment of the workers earnings (from 2009 to 2021) out of a work history that spanned 40 years. Social Security taxes. "Cost-of-Living Adjustments. Understanding this benefits calculation process may allow you to have increased confidence that your benefits are fairly secure, regardless of any future actions taken by Congress to deal with Social Security shortfalls.
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