Among the most popular Social Security questions that I hear from baby boomers getting ready to retire is "how are Social Security benefits calculated?" This is a vital question as it could affect how long you require to work, whether you need to continue to work during your retirement years, or any other factors of your retirement plan.

First, please note that you get a Social Security retirement benefit estimate every year in the mail, usually near your birth date. There're also a few calculators available on the Social Security web site to assist you estimate how much your retirement benefits will be, thus you don't require to know the methods to calculate the benefit yourself.

It's still useful to know how Social Security is calculated, but, so here are the principles:

Mostly, your highest 35 years of earnings are listed for inflation, then averaged to determine the base for your per month benefit. If you worked less than 35 years, the missing years will be calculated as nothing for purposes of determining your benefit amount.

Planning suggestion: If you've near 35 years of earnings and you're near to retirement, you will benefit significantly by continuing to work until you've 35 full years of earnings to include in your benefit calculation. The majority of people it'll affect are females who took time off work to raise a family.

The highest 35 years of earnings are then divided by 35 to get your average indexed monthly earnings (AIME). A formula is applied to your Average indexed monthly earnings to determine your primary insurance amount (PIA). We will not go into the details of the formula; the significant thing to notice is that your Primary insurance amount is the completely unreduced benefit you'd receive if you retired at your full retirement age (at the age of 66 for people born between 1943-1954). This amount will be reduced if you take early retirement or increased if you retire after age 66.

The Primary insurance amount is also the base for other benefits like spousal benefits, therefore it is crucial to understand that your Primary insurance amount isn't necessarily the same amount that you'll receive. If you're married and your spouse will be collecting benefits based on your earnings rather than her own, then you might need to maximize your own Primary insurance amount to maximize the total Social Security benefits you & your spouse will obtain.

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