Posted by The TaxAdvocate Group, LLC

Social Security Benefit Estimates

Social Security Benefit Estimates

If you're a regular U.S. worker close to retirement, you have been shoveling money from payroll or self-employment taxes into the social security system for decades. Over a period of time, you and your employer may have contributed more than $200,000 to the scheme on your behalf. If you also count on these contributions in the time value of money, your total system contribution could be twice as much. Now is the perfect time to turn the tables and determine what you are owed by the Social Security Administration (SSA).

Anticipate your income from social security

Two facts are known — Social security benefits are not guaranteed, and some improvements will be required in the future to keep the program stable as millions of baby boomers retire and start receiving their social security benefits. While these facts add uncertainty, it's also true that your retirement quality is dependent on your planning — and you have to start planning somewhere.

A good starting point is to determine the number of retirement benefits that you are entitled to for all of your years of social security contributions under the current law. Four ways to do this are available:

To get a record of your taxed social security earnings and an estimate of retirement benefits (although it won't take into account future earnings or other changes that might affect your payouts), you can visit a local social security office.

You may visit the website of Social Security and use one of its free benefit calculators to calculate your pension estimate based on your income record.

You may wait until you decide to start receiving benefits and allow the SSA to measure for you the number. However, it does not help you prepare ahead. And while it is generally possible to rely on the SSA to accurately determine benefits, mistakes can still be made along the way.

You can use the step-by-step method described in this article to measure your own benefits. It's not that complicated once you get a grasp on a few basic concepts. The advantage of determining your own benefits is that by continuing to work, you can make decisions and weigh trade-offs, such as whether you can afford to retire early or how much you can increase your benefits.

Phase 1: Get your AIME optimized

The important idea behind Social Security is that for as long as one continues to work, they will also continue to earn benefits for every dollar they contribute to the pension system. A non-working spouse is eligible for half of the benefits of the working spouse, so every extra dollar a worker receives will potentially be 1.5 times the benefits.

In the first step, calculating your Average Indexed Monthly Earnings (AIME) is embedded in this idea. It starts with the column showing "Your Taxed Social Security Earnings" year after year on your social security statement. Next, you multiply the earnings of each year by a factor for that year based on the National Average Wage Index (NAWI). This adjusts the contributions of past years to wage inflation effectively, making them more comparable to those of recent years.

Based on the current NAWI, Social Security releases a new table of wage inflation variables every year. The table published in the year you turn 60 is what matters for your benefit calculation. Any earnings you receive after age 60 may increase your benefits, but a NAWI table factor of 1.0000 is added to them, which only means that they will not be adjusted for potential wage inflation.

Step 2: Bend Your Benefits

The next step is to turn the AIME into a Primary Insurance Number (PIA) by running it through a formula called "bend points." Social Security is structured as a "progressive" social insurance scheme, which ensures that it covers more of the average monthly salary for low-income workers than for high-income workers. The bend points put this skew into effect relative to the AIME of each worker.

There are two bend scales, both of which are adjusted annually for inflation. For each worker, the applicable bend points are those reported in the year that the worker is first eligible for benefits (age 62).

Step 3: PIA Adjustments

PIA determines the monthly Social Security benefit that a worker who starts benefits at full retirement age will receive in the first year of benefits. For people born between 1943 and 1954, the full retirement age is 66; it increases every year for those born after 1954 by two months and reaches 67 for those born in 1960 and later. A spouse who applies on a worker's record for compensation will receive half of the PIA of the worker, given that he or she begins benefits at full retirement age.

The Bottom Line

This mechanism will give you greater confidence that your benefits are fairly secure, independent of any future actions to be taken by Congress to fix shortcomings in social security. With millions of Americans, the SSA has spent vast resources in databases, processes, and tools needed to carry out these estimates. As you can see, minimum benefits are "locked-in" on the basis of estimates made between 60 and 62 years of age. Therefore, you may be less vulnerable to any changes made to the system in the future as you step into that age range.

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