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How Is My Social Security Benefit Calculated?

Factors like your earnings, age and inflation play a role

Q. I plan to begin my retirement benefit next month. How will Social Security calculate how much money I'll get?

A. The size of your benefit will depend heavily on how much you earned during your working life. Generally speaking, the more you earned, the higher your benefit will be. But factors beyond your control, such as inflation and formulas programmed into Social Security computers, will figure in, too.

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Here's how it works:

Social Security keeps a record year-to-year of how much you make, up to a certain ceiling, $110,100 in 2012. If you make anything above the ceiling, it does not go onto your work record and is not subject to the FICA tax that funds Social Security.

When you apply for benefits, computers at the agency will adjust or "index" your wage history to account for changes in average wages since the years that you received the earnings. The computers will focus on the 35 years in which you earned the most money. If you didn't work a full 35 years, zeroes will be substituted for those missing years.

The next step is to apply a special formula to those indexed earnings to arrive at your basic benefit, which Social Security calls your "primary insurance amount" (PIA). This is the sum you're eligible for at your full retirement age.

What is the special formula? Basically, it's a set of calculations that helps level the playing field between lower wage earners and higher wage earners. For instance, low wage earners who retired at age 66 in January 2009 got benefits that replaced about 56 percent of their preretirement income; for high wage earners, the figure was 34 percent.

Several other factors can affect the actual amount of money you receive each month:

  • If you begin your benefits at 62, the earliest you can do so, your checks will be reduced to compensate for the fact you'll be getting checks for a longer time than if you begin at full retirement age.
  • Your benefit will rise in years in which there's a cost-of-living increase.
  • If you take benefits and continue to work between ages 62 and full retirement age, some of your benefits may be withheld if you earn more than a ceiling amount, $14,640 a year in 2012. A different dollar limit applies in the year in which you reach full retirement age but only up to the month of your birthday — after that, the earnings limit goes away. The money that was withheld will be returned to you after full retirement age in the form of higher benefits.

You can get an estimate of your future benefit at Social Security's online benefit estimator. You can also get estimates of survivor and disability benefits. AARP also offers a benefits calculator.

Stan Hinden, a former columnist for the Washington Post, wrote How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire. Have a question for the Social Security Mailbox? Check out the archive. If you don't find your answer there, send a query.

You may also like: 10 ways to tune-up Social Security.

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