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How are Social Security benefits calculated?

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  • First, a worker’s previous earnings are restated in terms of today’s wages to reflect wage growth.
  • Second, earnings for the highest 35 years are averaged and divided by the number of months in 35 years to arrive at Average Indexed Monthly Earnings (AIME).
  • Third, the Social Security benefit formula is applied to AIME to produce the Primary Insurance Amount (PIA), the benefit payable at the Full Retirement Age (FRA).

Work at least 35 years.

If you have less than 35 years of earnings (for example, you were laid off and out of work for three years during your working years), you may want to work enough additional years so you have a full 35 years of earnings. Otherwise, the Social Security Administration will average in zeros for any years less than 35.

The net result? Your Social Security retirement benefit will be lower, due to the zero earning years.

Consider this simplified, hypothetical example: Jill earned $50,000 for 35 years; her average earnings per year are $50,000. Jack also earned $50,000 for 35 years, but in three of those years, he had no income due to layoffs. His average earnings over 35 years? $45,714, almost $4,300 less than Jill, even though he earned the same wage. If he works three additional years at $50,000, he will have a full 35 years of earnings, and then his average earnings would rise to $50,000 annually.