What is 'Average Indexed Monthly Earnings (AIME)'

Average indexed monthly earnings (AIME) is a calculation used to determine the primary insurance amount (PIA), which is used to value an individual's social security benefits. The average indexed monthly earnings takes the top 35 highest earning years up to age 60 and indexes it for wage growth, and then averages it to get a monthly amount. The AIME tries to approximate earnings over a lifetime at today's wage levels.

BREAKING DOWN 'Average Indexed Monthly Earnings (AIME)'

In order to calculate the PIA, the average indexed monthly earnings (AIME) is split into three parts. Predetermined percentages are applied to each part, and they are all summed together to get the PIA. If someone receives Social Security benefits, the number they use to calculate that benefit is from the primary insurance amount (PIA).

For example, suppose a person's AIME is $5,000. The PIA calculation would take 90 percent from the first $744, then 32 percent from earnings over $744 but under $4,483, and lastly 15 percent of monthly earnings over $4,483. In this example PIA would be $1,943.63.

The Average Indexed Monthly Income (AIME) Calculation

The Social Security administration uses the PIA calculation because of Title II of the Social Security Act, under the 1978 New Start Method. Each calendar year, each covered worker with wages up to the Social Security wage base (SSWB) is recorded. Making the calculation for Social Security benefits starts by looking at how long you worked and how much you made each year during your 35 highest earning years...

1. Start with a list of your earnings each year. Earnings history is shown on a Social Security statement, which is available online. Only earnings below a specified annual limit are included. This annual limit of included wages is called the contribution and benefit base.

2. Adjust each year of earnings for inflation. Social Security uses a two-step process called wage indexing to determine how to adjust earnings history for inflation.

  • Each year, Social Security publishes the national average wages for the year, a list that's available on National Average Wage Index page.
  • Wages are indexed to the average wages for the year someone turn 60. For each year, divide average wages of the indexing year (which is the year you turn 60) by average wages for the year being indexed. Then, multiply included earnings by this number.

For someone under age 62, the calculation will only be an estimate. Until average wages for the year someone turns 60 is known, there is no way to do an exact calculation. However, it is possible to attribute an assumed inflation rate to estimate the average wages.

3. Use the highest 35 years of indexed earnings to calculate monthly average. The Social Security benefits calculation uses the highest 35 years of someone's earnings to calculate their average monthly earnings. If someone doesn't have 35 years of earnings, a zero will be used in the calculation, which will lower the average. Total the highest 35 years of indexed earnings and divide this total by 420 (the number of months in a 35-year work history). The result is a person's AIME.

RELATED TERMS
  1. Primary Insurance Amount - PIA

    A calculation, used in conjunction with the Average Indexed Monthly ...
  2. Indexed Earnings

    A worker's past wages that have been adjusted for changes in ...
  3. Alternative Investment Market - ...

    A sub-market of the London Stock Exchange that permits smaller ...
  4. Real Income

    Real Income is the income of an individual or group after taking ...
  5. Life Insurance

    A protection against the loss of income that would result if ...
  6. Amount at Risk

    The monetary difference between the death benefit paid by a permanent ...
Related Articles
  1. Retirement

    How Much Social Security Will You Get?

    Learn how to calculate your social security benefits! You've been paying in for years - now it's time to find out what the system owes you.
  2. Retirement

    Delaying Social Security Can Add Up

    The age you start collecting Social Security benefits significantly affects how much you will get each month. Do the math before deciding when to file.
  3. Retirement

    5 Tips to Increase Your Social Security Check

    These planning tips could increase your Social Security income benefits, which can significantly enhance your financial security.
  4. Retirement

    Top 6 Myths About Social Security Benefits

    Misinformation on retirement benefits is common. We'll set the record straight.
  5. Retirement

    How Working After Retirement Affects Social Security

    Working after retirement can positively affect your Social Security benefits.
  6. Retirement

    Social Security Strategy for Couples and Divorcees

    Those couples and divorcees born before 1954 can still take advantage of a Social Security loophole.
  7. Retirement

    The 3 Best Social Security Calculators For 2016

    Find out how to analyze your Social Security benefits under different retirement scenarios using multifunctional online Social Security calculators.
  8. Financial Advisor

    How Working Longer Impacts Social Security

    A look at the impact of working longer on Social Security retirement benefits.
  9. Financial Advisor

    Top Social Security Tips for Government Employees

    Government employees have special issues to consider when it comes to computing Social Security payouts. Here's how to navigate them.
  10. Financial Advisor

    What Will My Social Security Check Look Like?

    It's important to know what your Social Security check will look like in retirement. Here's how you can figure it out.
RELATED FAQS
  1. How are Social Security benefits affected by your income?

    Understand the relationship between a worker's earned income and benefits he or she receives from Social Security in retirement, ... Read Answer >>
Hot Definitions
  1. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  2. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  3. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  4. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Candlestick

    A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick ...
Trading Center