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How Are Someone’s Social Security Benefits Determined?

Can you count on at least $3,000 a month, or should you be planning on a monthly retirement benefit that’s closer to $2,000? What about your spouse’s benefit? 

It’s hard to do any meaningful retirement planning if you have no idea how much your Social Security benefit is going to be. The amount you receive each month from Social Security is determined by your lifetime earnings and the age at which you claim benefits, so it’s in flux while you’re still working and paying into the system. Your benefit amount isn’t “locked in” until you apply and are approved for benefits; from that point forward, you’ll receive the same amount every month for the rest of your life. Understanding how your Social Security benefit is calculated allows you to get that number as high as possible before you retire. 

Qualifying for Your Social Security Benefits

Make sure you qualify for Social Security benefits before counting on them as part of your retirement plan. Nearly all workers do qualify; just ~3.5 percent of people between 60 and 89 don’t or won’t receive benefits. They’re generally people who either didn’t work consistently or who held jobs but didn’t pay Social Security taxes on their earnings. 

Specifically, Social Security eligibility is determined using a measurement called work credits. You earn credits by earning income, with each worker being allowed to earn a maximum of four credits each year. For 2022, workers earn one credit for every $1,510 they earn in taxable income. So anyone who pays Social Security taxes on an annual income of at least $6,040 will earn the full four credits this year. How many credits a person needs depends on what kind of benefit they’re claiming.

Workers over 62: You must earn at least 40 credits to qualify for retirement benefits. If you’ve been working for at least 10 years, you’ve probably already fulfilled this requirement. 

Spouses of eligible workers: An individual may earn partial Social Security benefits on their spouse’s earnings record, even if the spouse has no work credits. 

Disabled workers: How many credits a person needs to qualify for disability benefits depends on the age at which they become disabled; generally, an applicant needs to have earned at least two work credits per year between the time they turned 21 and the time their disability began. The SSA also requires medical documentation verifying the disability.

Family members of eligible worker: Survivors benefits may be paid out to a worker’s widow/er, minor children, dependent parents and other relatives in certain circumstances. Whether survivors qualify depends on the deceased’s earnings records.

How Social Security Benefits are Calculated

When you decide to claim Social Security and start receiving benefits, the SSA calculates your monthly average earnings over the 35 years in which you earned the highest income. (The amounts are indexed to account for inflation.) That “35 year rule” may be important as you think about when you want to claim Social Security. The SSA always averages your income over 35 years, which means retiring early could reduce your benefit. Say you retire after working for 30 years. The SSA will calculate your average income by averaging 30 years of earnings and five years of zero income.

Once the SSA has determined your averaged indexed monthly income, a complex formula is used to determine your primary insurance amount (PIA). It’s the amount you’ll get each month if you start claiming benefits when you reach your full retirement age.

Taking Social Security before your full retirement ages reduces your benefits by 5/9 of 1 percent for each month before your full retirement age, up to 36 months. If you claim benefits more than 36 months before your FRA, the amount is further reduced by 5/12 of 1 percent for each month. Also keep in mind that if you start collecting Social Security before full retirement age, your benefit may be reduced if you also work. For 2022, if you collect Social Security prior to full retirement age, once you make more than $19,560 your benefit will be reduced by $1 of benefit for every $3 you earn.

Ultimately, taking Social Security at 62 can cut your monthly benefit by as much as 30 percent. But if you delay benefits, and don’t claim Social Security at your full retirement age, your benefit is increased by as much as 8 percent per year until you reach 70. You don’t have to start collecting Social Security at 70, but your benefit amount is capped at this point so consider this the last date you’d conceivably claim benefits. 

If your spouse claims spousal benefits on your record, they’re entitled to half of your PIA. Spousal benefits are reduced when they’re claimed before the spouse’s full retirement age, and increased when they’re delayed.

Maximizing Social Security Benefits

In most cases, the goal with Social Security planning is to delay benefits for as long as possible. Waiting until 70, or at least until your full retirement age, locks you into your maximum possible benefit for the rest of your life. But everyone’s financial plan is unique; sometimes it makes better sense for someone who needs to retire at 62 to take Social Security early than to tap into their savings, for example. 

It’s easy to access information that helps you estimate your future benefits. Use your mySocialSecurity account at SSA.gov to see projections based on when you claim benefits. Your financial advisor can then help you evaluate and compare all the potential scenarios to find the Social Security strategy that best supports your goals. 

A financial planning strategy is also key for making sure you’re on track with long-term retirement goals. Having a financial plan for your 60s that doesn’t rely entirely on Social Security allows you to let your benefit grow without sacrificing any comfort in early retirement.Let the advisors at Sachetta, LLC help you evaluate the role that Social Security benefits are going to play in your retirement, and make sure you’re on target with your financial goals. Contact us today.




Michael J Callahan, CPA, CFP®, MST, is a Certified Financial Planner™ practitioner, Certified Public Accountant, and holds a Master’s Degree in Taxation from Bentley University. Mike has been involved in personal financial planning, as well as both business and individual taxation for more than 15 years. Our ideas about money are formed by our life experiences. Over the years, Mike has seen those close to him make common money mistakes from not having enough life insurance, to not doing the proper estate planning. When he received an inheritance in college and started looking into how he could use it to achieve his goals, he realized that he could use those experiences to help others. He changed his major to Finance, and the rest is history.