Do you know how Social Security benefits are calculated? Have you ever been curious about what goes into your Social Security benefit amounts? The Social Security Administration (SSA) uses a complex formula to determine the amount of monthly retirement income that individuals receive from their past earnings. Although the intricate calculations can seem daunting, understanding them is necessary to make sure that you are getting the most out of your valuable retirement savings. In this blog post, Anthony Pellegrino takes an in-depth look at how Social Security benefits are determined and explore everything else you need to know before qualifying for payout.
Anthony Pellegrino On How Social Security Benefits Are Calculated
Social Security benefits are calculated based on an individual’s earnings over their working lifetime, says Anthony Pellegrino. The Social Security Administration (SSA) takes the average monthly income for a person’s 35 highest earning years and adjusts it to reflect changes in national wages from year to year. This process is called indexing and allows workers whose earnings were lower than the national average in certain years to receive some credit for those years.
The most someone can earn annually for the purpose of calculating Social Security benefits is limited by the annual wage index, which changes each year. For 2020, that limit is $137,700 per year. Any amount earned above this limit will not be counted toward Social Security benefits calculations.
The SSA uses a formula to calculate a worker’s benefit based on the indexed earnings. For those born in 1937 or earlier, the total is divided by 12. Those born after 1937 will receive 90% of the first $960 of their average monthly income, plus 32% of any income over $960 and up to $5,785 per month. They’ll then get 15% of any income beyond that amount.
The total received is then divided by 12 to determine the monthly benefit amount.
Social Security benefits can be reduced depending on other sources of income and when a person begins collecting them. For example, if someone decides to take their Social Security payments before they reach full retirement age (66-67 for those born in 1943 or later), benefits will be permanently reduced. In addition, recipients who continue to work while receiving Social Security may have some of their benefits withheld if their combined income exceeds a certain level ($18,240 in 2020).
According to Anthony Pellegrino, the SSA also looks at whether people are eligible for public or private pensions from previous employment and takes that into consideration when calculating Social Security benefits. Benefits can also be impacted by spousal earnings and disability benefits.
Anthony Pellegrino’s Concluding Thoughts
In summary, Social Security benefits are calculated based on a person’s average monthly earnings over their 35 highest earning years and indexed to the national wage index. The formula used to calculate these benefits is dependent upon when the recipient was born and other sources of income they may be receiving. Factors such as early retirement or working while collecting Social Security can also reduce one’s benefit amount. It’s important, as per Anthony Pellegrino, for everyone to learn how these calculations work so that they can make an informed decision about when it makes sense for them to begin taking their Social Security payments. In 2020, around 62 million Americans received approximately $1 trillion in Social Security benefits, with the average monthly payment being just over $1,300. Knowing how Social Security calculations work can help ensure that individuals maximize their benefits.