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 you and your employer together have contributed more than $200,000 into the system on your behalf over time. 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. (For background reading, see Introduction To Social Security.)

Anticipating Your Social Security Income

Of course, we know two facts: 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. While these facts add 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 find out the amount of retirement benefits that all your years of Social Security contributions entitle you to under current law. There are three ways to do this:

  1. You can 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 payouts). You can locate an office list here.
  2. You can wait until you decide to start receiving benefits and let the SSA calculate the amount for you. However, this doesn't help you to plan ahead. And while you can usually count on the SSA to determine benefits accurately, mistakes can be made.
  3. You can calculate your own benefits using the step-by-step process described in this article. Once you understand a few basic concepts, it's not that difficult. One advantage to calculating your own benefits is the ability to make decisions and tradeoffs, such as whether you can afford to retire early or how much you can increase your benefits by continuing to work. (For more on this, see Retiring Early: How Long Should You Wait?)

Step 1: Calibrate 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 non-working 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 Taxable Social Security Earnings" year by year. Next, you multiply each year's earnings by a factor based on the National Average Wage Index (NAWI) for that year. This effectively adjusts past years' contributions for wage inflation, making them more comparable to recent years.

Social Security publishes a new table of wage inflation factors each year, based on the current NAWI. The table that matters for your benefit calculation is the one published in the year you turn 60. Any wages you earn after age 60 can increase your benefits, but they are assigned an NAWI table factor of 1.0000, which means that they are not adjusted for future wage inflation. The table in Figure 1 below from Social Security Online helps to explain the AIME calculation for a worker born in 1951 who plans to retire in 2017 at age 66. It assumes the employee has worked from 1977 through 2016.

Earnings before and after indexing
Year Case B, born in 1951






2005 90,000 1.1631 104,678
2006 94,200 1.1120 104,749
2007 97,500 1.0637 103,711
2008 102,000 1.0398 106,058
2009 106,800 1.0557 112,750
2010 106,800 1.0313 110,146
2011 106,800 1.0000 106,800
2012 110,100 1.0000 110,100

Source: Social Security Administration

Column 1 shows the worker's annual earnings subject to Social Security payroll tax. Column 2 shows the wage index factors as published in 2017. Column 3 shows annual indexed earnings (Column 1 X Column 2). Notice that the index factor becomes 1.0000 in 2011, the year in which the worker turns 60, and remains 1.0000 during 2012. It would not change for any future years of taxable earnings. So, if you plan to continue working after age 60, just project your taxable earnings in Column 1 and use 1.0000 in Column 2 for all future years.

Figure 1 shows only a segment of the worker's earnings (2005-2012) out of a work history that spanned 40 years. The SSA performs a similar calculation on all past years in which any contributions were paid. Then the average of all indexed earnings from the 35 highest-income years (from Column 3 above) is used. To do this, simply add up the highest 35 years and divide by 35, or to get monthly amounts take the sum and divided by 420 (35 years x 12 months) to arrive at your AIME. In this case the previous 35 top-earning years add up to $3,714,380, so the AIME would be calculated to be $8,843.

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 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 calculation below assumes the worker has an AIME of $8,843 and is eligible for retirement in 2017. For workers who have earned higher nominal earnings than described, Social Security Online is a good resource to determine your AIME.

1st Bend Point 2nd Bend Point Above 2nd Bend Point
Bend Point $791 $4,768 -
AIME Subject to Bend Point $791 $3,977 $0
Constant Multiplier* 90% 32% 15%
PIA Tier $791 x .90 = $711.90 $3,977 x .32 = $1272.64 $4,075 x .15 = $611.25
PIA .9(791) + .32(4768 - 791) + .15(8843 - 4768) = $2,595.79
Figure 2: * These 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.
Source: Social Security Administration. See most recent bend points at www.socialsecurity.gov/OACT/COLA/piaformula.html.

Step 3: Adjustments to PIA

In our example above, the worker's benefits also get increased by cost-of-living adjustments COLA) for 2013 through 2016. These COLAs are 1.5%, 1.7%, 0.0% and 0.3% respectively. The resulting PIA is $2,687.30.

PIA determines the monthly Social Security benefit that will be received in the first year of benefits by a worker who starts benefits at full (or normal) retirement age. Full retirement age is 66 for individuals born between 1943 and 1954; it increases by two months each year for those born after 1954 and becomes 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 he or she starts benefits at full retirement age.

But what about a worker who elects to start receiving benefits before reaching his or her full retirement age? Let's take the case of someone born in 1955, retires in 2017 at age 62 (his normal retirement age is 66 years and 2 months). A benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month. In this case the monthly benefit of $1,796.10 would be reduced to $1,436.00 a month.

There are four ways that 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 full retirement age. For details on the reduction, see the SSA's Retirement Benefits by Year of Birth.
  • Delaying benefits beyond full retirement age. Delayed retirement credits can permanently increase benefits, and they are awarded for every month between full retirement age and a later onset of benefits. Details can be found in the SSA's publication on "Delayed Retirement Credits."
  • Starting early and continuing to work. If you start benefits before full retirement age and keep working, the SSA may deduct the part of your benefits that exceeds a threshold. Details can be found in the SSA's publication, "You Can Work and Get Social Security at the Same Time." However, any such deductions are not permanent. When you reach full retirement age, 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. (For more insight, see Stretch Your Savings By Working Into Your 70s.)

All four points are related to your starting Social Security benefits. Keep in mind that once your benefits start, they will be increased annually for the COLA. 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.

So, What Good Is this Calculation?

If you are in your late 50s and are 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 (420 months in 35 years). This will approximate your AIME.
  • Use the most recently published bend points to convert your AIME into a PIA. (For more insight, check out Microsoft Excel Features For The Financially Literate.)

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 1.0 in Column B for all future years.

A financial advisor who fully understands this process can be helpful in verifying your calculations, advising you on when to start Social Security benefits and estimating the future benefits that you can expect to receive.

The Bottom Line

Understanding this 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 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. So, once you move into that age range, you may be less vulnerable to any changes made in the future.

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