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How to Calculate Social Security Benefits - A Step by Step Guide


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How To Calculate Your Primary Insurance Amount
How to Calculate Your Primary In

How to calculate your primary insurance amount based on the Social Security bend point formula.

Once you have calculated your Average Indexed Monthly Earnings (AIME), you plug that number into a formula to determine your Primary Insurance Amount, or PIA.

Social Security Bend Points

The Social Security benefits formula is designed to replace a higher proportion of income for low income earners than for high income earners. To do this, the formula has what are called “bend points”. These bend points are adjusted for inflation each year.

Bend points from the year you turn 62 are used to calculate Social Security Retirement Benefits. The example above uses 2012 bend points. It works like this:

  • You take 90% of the first $767 of AIME.
  • You take 32% of the next $3,856 of AIME.
  • You take 15% of any amount over that second bend point.
  • You total those three numbers.

The result is your Primary Insurance Amount, or PIA, the amount you will receive if you begin benefits at your Full Retirement Age. Your PIA is rounded to the next lowest dime, and your benefit amount is rounded to the next lowest dollar. (Technically your PIA is calculated, rounded to the next lowest dime, then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Then any increases or decrease based on age are applied, and any deduction for Medicare premiums are applied. That number is then rounded down to the next lowest dollar. Some of this is covered in the next step.)

You can see historical bend points and the current year's bend points on the Bend Formula Bend Points page of the Social Security website.

If you are not yet 62, your benefit calculation is only an approximation, as you do not yet know what the final bend point amounts for the year you turn 62 will be. You can use an estimated inflation rate to approximate future year's bend points to develop a pretty accurate approximation.

In the example at the top of the page (which you can click on to enlarge) you can see how the AIME calculated in the previous step were plugged into the bend point formula to calculate the Primary Insurance Amount.

Can your PIA change after you reach age 62?

There are two things will affect your PIA after you reach age 62:

  1. Higher Earnings - Earnings in years between age 62 and 70 that are higher than one of the 35 highest earnings year’s previously used in the formula will change your AIME which is used in the PIA formula.
  2. Inflation - Your PIA will be adjusted by the same Cost of Living Adjustments applied to people who are already receiving Social Security benefits. You can see historical Cost of Living Adjustment Rates on the Social Security website.
    ***Note: this is not the same adjustment that is used to index wages for inflation.

Word of caution: the biggest reason people get the wrong answer when they run their own calculations on when to begin Social Security is because they take the numbers off their statement and do not properly apply inflation adjustments.

Next: How your PIA is adjusted based on the age at which you begin benefits.

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