If you are a typical U.S. worker nearing retirement, you have been shoveling money into the Social Security system through payroll or self-employment taxes for decades. It’s possible that, over time, you and your employer together have paid more than $200,000 into the system on your behalf. If you also figure in the time value of money on these contributions, your total contribution to the system could be twice as much. Now the time is approaching to turn the tables and determine what the Social Security Administration (SSA) owes you.

How to Estimate Your Social Security Income

Two facts are known—Social Security benefits are not guaranteed, and some changes will be necessary to keep the system solvent in the future as millions of baby boomers retire and begin to receive their Social Security benefits. Though these facts create uncertainty, it’s also true that the quality of your retirement depends on your planning—and you must start planning somewhere.

A good starting point is to figure out the dollar amount of the retirement benefits to which all of your years of Social Security contributions entitle you under current law. There are four ways to do this:

1. Visit a local Social Security office to get a record of your taxed Social Security earnings and an estimate of retirement benefits (though it won’t take into account future earnings or other changes that could impact your monthly payouts).
2. Visit the Social Security website and use one of its online benefit calculators to determine your retirement estimate based on your earnings record.
3. Wait until you decide to start receiving benefits, and let the SSA calculate the amount for you. However, this doesn’t help you plan, and though the SSA can usually be counted on to determine benefits accurately, mistakes are sometimes made.
4. Calculate your own benefits using the step-by-step process described in this article. When you understand a few basic concepts, it’s not that difficult. One advantage of calculating your own benefits is that you can make decisions and consider trade-offs, such as whether you can afford to retire early or how much you can increase your benefits by continuing to work.

Step 1: Calculate Your AIME

One important idea behind Social Security is that workers can keep earning benefits for every dollar they pay into the retirement system for as long as they keep working. A nonworking spouse qualifies for half of the working spouse’s benefits, so each extra dollar a worker earns can actually be worth 1.5 times the benefits.

This idea is embedded in the first step, the calculation of your average indexed monthly earnings (AIME). It begins with the column on your Social Security statement that shows your taxed Social Security earnings year by year. Next, you multiply each year’s earnings by a figure based on that year’s National Average Wage Index (NAWI). This effectively adjusts past years’ contributions for wage inflation, making them more comparable to recent years.

The Social Security Administration publishes a new table of wage indexing factors each year, based on the current NAWI. The table that matters for your benefit calculation is the one published the year you turn 60. Any wages you earn after age 60 can increase your benefits, but they are assigned a NAWI table factor of 1.0000, which means they are not adjusted for future wage inflation.

The table below helps to explain the AIME calculation for a worker born in 1956 who plans to retire in 2022 at age 66 and two months, their full retirement age (FRA). It assumes the employee has worked from 1982 through 2021.

Source: Social Security Administration.

The second column shows the worker’s annual earnings that are subject to Social Security payroll tax. The third column shows the wage index factors, as published in 2021. Column four shows annual indexed earnings (the second column x the third column). 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. If you plan to continue working after age 60, project the taxable earnings in the second column and use 1.0000 in the third for all future years.

The table above shows only a segment of the worker’s earnings (from 2009 to 2021) out of a work history that spanned 40 years. The Social Security website has a full table. The SSA performs a similar calculation for all past years in which any contributions were paid. Then the average of all indexed earnings from the 35 highest-income years (from the fourth column above) is factored into the calculation.

To do this, add up the highest 35 years and divide by 35, or to get monthly amounts, take the sum and divide by 420 (35 years x 12 months) to arrive at your AIME. In this case, the previous 35 top-earning years add up to $4,259,563, so the AIME is calculated to be $10,141.

Step 2: Bend Your Benefits

The next step is to convert your AIME into a primary insurance amount (PIA) by running it through a calculation called “bend points.” 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. The bend points implement this skew relative to each worker’s AIME.

There are two bend points, and both are adjusted for inflation each year. The relevant bend points for each worker are those published in the year the worker first becomes eligible for benefits (age 62). The bend points are published each year by the Social Security Administration. In calculating the PIA, the SSA has established fixed percentages as multipliers (90%, 32%, and 15%), which are applied to the individual’s AIME.

Primary Insurance Amount Calculation

For 2022, the SSA established the first bend point as $1,024 and the second bend point as $6,172. Using the AIME from the earlier example of $10,141 and the bend points, we can calculate the primary insurance amount (PIA).

Below are the steps to calculating the PIA:

• Multiply the first $1,024 of the person’s AIME by 90% (.90*$1,024) = $921.60
• Subtract the 1st and 2nd bend point and multiply that difference by 32% ($6,172-$1,024) = $5,148*.32 = $1,647.35*
• Subtract the 2nd bend point amount from the total AIME amount and multiply the difference by 15%. ($10,141-$6,172) = $3,969*.15 = $595.35

*Please note that the calculation results are required to be rounded down to the next lower multiple of 10 cents.

• The PIA is the sum of the three calculation results: ($921.60 + $1,647.35 + $595.35) = $3,164.30

*The multipliers—90%, 32%, and 15%—are set by law and do not change annually. The bend points are inflation-indexed but only through age 62. PIA is effectively locked in at age 62.

Step 3: Adjustments to PIA

In our example above, the worker’s benefits were based on 2022 figures, but usually, the SSA adjusts the level of benefits based on the pace of rising prices in the economy—called inflation. The adjustment is called a cost-of-living adjustment (COLA).

For example, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 5.9% COLA in 2022, while the COLA was 1.3% for 2020 and 1.6% for 2019.

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. A spouse who qualifies for benefits on a worker’s record will receive half of the worker’s PIA, assuming they start benefits at their FRA.

Benefit Reduction if Taken Before Full Retirement Age

When calculating benefits for early retirement, there are one or two calculations, depending on how early benefits are taken. Assuming a normal retirement age of 67, the age of 62 is the earliest year a person can receive benefits or 60 months early.

The benefit is reduced by 5/9 of 1% for each month before the normal retirement age (67), up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of 1% per month.

For example, let’s say that a person wants to retire at 62, leading to a 60-month reduction from the normal retirement age of 67. The first 36 months would be calculated as 36 months times 5/9 of 1% plus 24 months times 5/12 of 1%.

• First 36 months: 5/9 = .5555 * 1% = .005555 * 36 months = .19999 or 20%*
• Remaining 24 months: 5/12 = .416666 * 1% = .00416666 * 24 months = .0999 or 10%
• In other words, benefits would be reduced by 30% (20% + 10%) if taken at age 62.

*The results were rounded and multiplied by 100 to create a percentage.

Four Ways Benefits Can Be Increased or Decreased

There are four ways the starting benefit can be permanently increased or reduced from the PIA calculated at age 62:

• Starting benefits early—Benefits may begin as soon as age 62, but they are permanently reduced for every month between the onset of benefits and FRA.
• Delaying benefits beyond full retirement age—Delayed retirement credits can permanently increase benefits, and they are awarded for every month between FRA and a later onset of benefits.
• Starting early and continuing to work—If you start benefits before your FRA and keep working, the SSA may deduct the part of your benefits that exceeds a threshold. However, any such deductions are not permanent. When you reach your FRA, the SSA recalculates your benefits and credits back any deductions.
• Continuing to work, period—Even if you don’t start benefits early, you can increase your benefits by continuing to work up to any age. Any year in which your indexed earnings are higher than one of your 35 previous highest years will boost your benefits. However, after age 60, you will not receive wage indexing, and after age 62, you will not receive bend point inflation indexing.

All four points are related to your starting Social Security benefits. Keep in mind that when your benefits start, the COLA will increase them annually. If you start benefits at age 66, your PIA (determined at age 62) automatically increases with the applicable COLAs from the years in which you turn 63 through 66.

How to Calculate Social Security Benefits in Excel

If you are in your late 50s and approaching retirement, you can create a useful model of your future benefits. It works best to do this in a Microsoft Excel spreadsheet, as follows:

• Using a recent Social Security statement, list in spreadsheet column A your taxable Social Security earnings year by year.
• List in column B the most recently published NAWI adjustment factors (year by year) as published by the SSA.
• Multiply columns A and B and output the result to column C.
• Identify in column D the 35 highest values in column C. Add these together and divide the sum by 420 (seeing as there are 420 months in 35 years). This will approximate your AIME.
• Use the most recently published bend points to convert your AIME into a PIA.

You also can fill in hypothetical values for estimated taxable Social Security earnings in future years until you plan to stop working. To be conservative, use a NAWI adjustment factor of 1.0000 in column B for all future years.

A financial advisor who fully understands this process can help verify your calculations, advise you on when to start Social Security benefits, and estimate the future benefits you can expect to receive.

The Bottom Line

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. The SSA has invested vast resources in the records, systems, and software required to perform these calculations for millions of Americans. As you can see, minimum benefits become locked in based on calculations made between the ages of 60 and 62. When you move into that age range, you may be less vulnerable to any changes made to the system in the future.