Social Security Benefit Calculation

[BadSaver]

Subject: Social Security Benefit Calculation (at Full Retirement Age)
Who might care: Those within 10-years of retirement.
The point of this: When might I quit working?
Why: You might find that you can pursue Cheap RV Living earlier than you thought.

Social Security is an important part of retirement planning. In my own personal financial planning I've been contemplating three mathematical problems: Benefit Calculation, Delayed Retirement, and Taxation.

I thought I would start by discussing the Benefit Calculation. At 56 years old, I wanted to know how continuing to work, paying into the social security, was going to change my benefit amount. To my surprise, continuing to work another 12-years didn’t change my benefit very much! Your situation may be different. Here’s how to figure it out.

Calculation Elements:
Maximum Earnings: Keep in mind that Social Security has a cap on earning that are taxed (Maximum Earnings). Earning greater than Maximum weren’t taxed and therefore don’t count. Most of us don’t have to worry about this.

Index Factor: Because of inflation, previous earnings are adjusted to present value using a FACTOR. Actual Earnings x Index Factor = Indexed Earnings.

Highest 35-Years: Social Security benefits are based on the average of the highest 35-years of Indexed Earnings.

Brackets: $0 - $856 by 90%, $856.01 - $5,157 by 32%, Over $5,157 by 15%

The Calculation (example):
1980 - $10,000 (Actual Earnings) X 3.71 (Factor) = $37,100 (Indexed Earnings)
1981 - $10,000 (Actual Earnings) X 3.37 (Factor) = $33,700 (Indexed Earnings)
1982 - $10,000 (Actual Earnings) X 3.20 (Factor) = $32,000 (Indexed Earnings)
1983 - $10,000 (Actual Earnings) X 3.05 (Factor) = $30,500 (Indexed Earnings)
1984 - $10,000 (Actual Earnings) X 2.88 (Factor) = $28,800 (Indexed Earnings)
1985 - $10,000 (Actual Earnings) X 2.76 (Factor) = $27,600 (Indexed Earnings)
1986 - $10,000 (Actual Earnings) X 2.68 (Factor) = $26,800 (Indexed Earnings)
1987 - $10,000 (Actual Earnings) X 2.52 (Factor) = $25,200 (Indexed Earnings)
1988 - $10,000 (Actual Earnings) X 2.40 (Factor) = $24,000 (Indexed Earnings)
1989 - $10,000 (Actual Earnings) X 2.31 (Factor) = $23,100 (Indexed Earnings)
2008 - $10,000 (Actual Earnings) X 1.12 (Factor) = $11,200 (Indexed Earnings)

Total Index earnings (above) is $300,000
Monthly Averaged Indexed earnings over 35-years (420 months) is: $300,000 / 420= $714 (per month)
Note: Above we worked 11 years (you must have 40 quarters). The other 24 years (35-11) are $0

Apply the brackets (above):
The calculated benefit is $642 per month ($714 x 90%)
Note: If the monthly average was between $856.01 - $5,157 we would multiply that portion by 32% and so on.

Conclusion: Using your social security statement, you should be able to recalculate the full retirement benefit. Make sure the outcome of your formula agrees with your social security statement before trying hypothetical. Insure your formula is correct.

Disclaimer: The above is for educational purposes only. It probably contains errors. Refer to the social security web site for actual information.
https://www.ssa.gov/pubs/EN-05-10070.pdf

 

[Queen]

Also, make sure you're not subject to the Windfall Elimination. I only worked eight years for the state civil service (IL state employees do not pay into social security), but I am now subject to the windfall exemption, this will end up costing me right at 50% of my social security benefit.

 

[SoulRaven]

I applied for SS in the last couple of weeks. An employee called and discussed it with me. Explained the benefit of continuing to work until I was 66, the "option". I also learned that in January 2016, they closed a "loophole" she called it. Previously, I could draw at 62 based on my own (very low) earnings and then at 66, get it bumped up based on my husband's earnings. That has now changed. Of all the loopholes in government regulations, this one they close.

Editing to explain: I would get 1/2 of my benefit at 62 vs waiting until 66. At 66, I would have gotten 1/2 of my husband's amount. Now, I will get 1/2 of my benefit plus 1/4 of my husband's at 62. So, to get even, I plan to live to be 102. Most of my family died early, so they have paid it forward for me.

I don't want to continue on the road I am on until I am 66, 4 years isn't a long time when you are 20, but when you are 62, it is a significant chunk of time.

In Kansas and living among older individuals in Arizona, I see where this all goes. I have been able to look and see the results of different scenarios.

You can never do enough planning to cover all contingencies. Most can never have a enough money or insurance or investments to cover expenses over an undefined amount of years.

I just decided a long time ago to not spend my time worrying about retirement, well, other than keeping healthy enough to live to see it.

Anyone looking at SS, try to keep up with the changes and expect they won't be in your favor.

 

[ccbreder]

If at all possible wait until you reach full retirement age. Today that is 66. Retire at 62 and benefit is 25% less. I'm realizing some can not physically continue working, so don't trash me.

 

[SoulRaven]

ccbreder, not trashing you, but there are so many more reasons to not continue working until you are 66 other than just physical. I noticed a marked difference after age 60 in my vitality and this was the first time any really hit me, not the 30, 40 or 50. There isn't enough time left to do everything I want to do, but 4 years will make all the difference. I am lucky to never have had "stuff" matter that much. I have always lived below my means even when my means were limited.

I work hard not to play "what if" and become paralysed with fear. Give me any situation and I can troubleshoot all the things that could go wrong, endless things.

 

[Suanne]

I took an early retirement in 2008 at age 53. To meet living expenses, I've been withdrawing from my tax-deferred retirement savings. When I withdraw those funds now, I pay full federal taxes on them.

One of the reasons I decided to start my Social Security benefits at age 62 (I get my first installment in February), is that the Feds tax Social Security funds at a much lower rate. That is, I'll be paying less federal taxes on the same amount of dollars. Which, in turn, means more spending money for me.

Plus, assuming I live to my full life expectancy (sometime in my late 80's), the total amount of Social Security benefits equals out whether I start at age 62, 66, or 70.

On a positive note for the Social Security Administration, I got amazingly quick service and approval when I applied for benefits. I filled out the online application exactly 3 months before my 62nd birthday. Four days later I got a phone call from a Social Security worker to clear up some questions on my early employment records. Three days after that, or one week after application, I looked online and was approved. So quick and painless.

May everyone's experience with the Social Security bureaucracy be so positive.

Suanne

 

[frater secessus]

Retire at 62 and benefit is 25% less. I'm realizing some can not physically continue working, so don't trash me.

Situations can be wildly divergent. Example: for the past several years I have been living on less than what my SS @ 62 income will be.* So it won't be a hardship to take the reduced amount.

fs
* aggressively paying off old debt. Down to my last credit card and that will be paid off on Jan 1. Being single again really, really helps.

 

[ArtW]

trying to do that confused me, and doesn't agree with my last estimated benefits statement

 

[SoulRaven]

One can call the SS office, normally though, they'll have to call you back, and they actually do call back. The first time I called them a few months ago, the employee called me back and answered questions and gave me totals. I got a call back shortly after filing my application on line. I was also set up for a phone appt to discuss whether our adult son with Down syndrome would or would not see increased benefits as I am his representative payee. I do not like appointments and paperwork so it is pure agony for me. Be prepared to spend some time on the phone so have your cell phone charged up. They work to be very thorough, I know that is good but.........

 

[Goshawk]

I took an early retirement in 2008 at age 53. To meet living expenses, I've been withdrawing from my tax-deferred retirement savings. When I withdraw those funds now, I pay full federal taxes on them.

One of the reasons I decided to start my Social Security benefits at age 62 (I get my first installment in February), is that the Feds tax Social Security funds at a much lower rate. That is, I'll be paying less federal taxes on the same amount of dollars. Which, in turn, means more spending money for me.

Plus, assuming I live to my full life expectancy (sometime in my late 80's), the total amount of Social Security benefits equals out whether I start at age 62, 66, or 70.

On a positive note for the Social Security Administration, I got amazingly quick service and approval when I applied for benefits. I filled out the online application exactly 3 months before my 62nd birthday. Four days later I got a phone call from a Social Security worker to clear up some questions on my early employment records. Three days after that, or one week after application, I looked online and was approved. So quick and painless.

May everyone's experience with the Social Security bureaucracy be so positive.

Suanne

Like to hear of these smart stories. Thanks Suanne. Analysis paralysis is a thing. Some can analyse SS to death. And then you get sick early and die. The bottom line is think of what you need to live on minimum. Many are doing fine with $15000 a year, but if you are a couple you might struggle on $25000 a year combined. Many need to get into the mindset that you are not getting out alive, and pain free. So start early to live every day like it's your last.


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[DannyB1954]

Social Security has it calculated out that no matter when you start drawing, your lifetime benefit will be the same. If you take it at 62 the monthly amount will be less, but it will be for a longer period. If you take it at 66, the amount will be more, but the time period less, (nobody lives forever).

If you have a family history on both sides that leads you to believe that you will live longer than average, it might be wise to wait. If you have reason to believe that you will not be here that long, it is wise to take it as soon as you can. It is a gamble either way. You could take it early and live long enough so that your lower monthly income puts you in a bind, Or you can wait hoping for a higher monthly amount and drop dead before you collect a dime.

Let's say at 62 you get $1000 a month, and at 66 you would get $1,400. Person #1 takes at 62, Person #2 takes at 66. At age 66, Person #1 will have received $1,000 times 12 months times 4 years or $48,000. Person #2 got zip, nothing. So now #2 gets an extra $400 a month. How long will it take them to catch up to the $48,000 they didn't get? 48,000 divided by 400 is 120 months or ten years. They are now 76 years old. 10 years is a long time, And it would probably take longer than that in reality as you do not get a 40% increase by waiting 4 years.

I had a heart attack at 50. I am taking the money ASAP. I don't need the money to meet expenses, but I can use it to pay off the mortgage which will give me another $500 a month to work with at 66 or even sooner. If I wait to draw at 66, I still have a mortgage payment. So like Clint Eastwood said in a movie, Do you feel lucky, well do Ya? I don't.

 

[ccbreder]

You are a bit off on that, $1000 at 62, or $1250 at 66. I took my SS at 66, but kept working until 68. I collect just over 1700 per month. If I left at 62, I would have less than $1100 per month. $600 a month comes in handy when beef is $15 pound.

 

[SoulRaven]

I think if you in your 60s and really wanting a quality of life not based entirely on the economic factor, it makes sense to look hard at retiring early. You can always work to supplement your income if needed as needed. You can't buy "time" with any amount of cash.

 

[Goshawk]

I think if you in your 60s and really wanting a quality of life not based entirely on the economic factor, it makes sense to look hard at retiring early. You can always work to supplement your income if needed as needed. You can't buy "time" with any amount of cash.

Thanks SG. So true.


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[ArtW]

good point, SS allows you to 'retire' and still work part time
I'm paying stuff off, getting myself set
if i 'retire' at 62, according to my current life income, I'll get $820 / month
If I wait for 66, it's 1210 / month
I had a lot of years I made below 10k
however, 62 is 12 years away, and i currently make in the 25K range, so by the time I get there, I should be better off than that
If SS still exists by then

 

[Goshawk]

If SS still exists by then

Love this idea as being so backwards.  So we will let elderly starve in the streets?  SS will always be there.  Just might have more means testing than it currently has (and it has a lot of means testing now).

 

[Canine]

While you folks are doing all this cyphering,don't forgrt the extra money you pay in to SS if you work till you are 65.Hell,we'll all be in good shape when we get our3/10 of a percent raise next year.

 

[ArtW]

Love this idea as being so backwards.  So we will let elderly starve in the streets?  SS will always be there.  Just might have more means testing than it currently has (and it has a lot of means testing now).

If the economy ever does collapse, where exactly will the SS administration get money to pay benefits?
And with a smaller and smaller % of people entering the workforce, and more and more boomers hitting retirement age, the system is already not that healthy
Eventually, you DO run out of other people's money, and SS is nothing more than a giant ponzi scheme

 

[Goshawk]

Will agree to disagree. Folks have been predicting economy collapse for decades in one form or another. If it all turns apocalyptic (meaning no SS) my ARMY OF DARKNESS and SURVIVORMAN and FURY ROAD instincts kick in. Let's tackle that the first day anyone anywhere converts to AMISH lifestyle to escape economic meltdown (amish conversion to survive is a good indicator. As they do well without government social input for decades). Lol.


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[ccbreder]

What means testing does SS use now?