“How Are Social Security Benefits Calculated and What Can I Do To Increase Benefits?”
There are a minimum number of years to qualify. To qualify for any Social Security benefits, you must have at least 40 credits. To receive a credit in 2017, you need to earn $1,300 per credit (this number adjusts each year), with a maximum of four credits per year. So to receive the 40 credits you have to work for at least 10 years earning enough income to qualify for the four credits each year.
How much you receive depends on how long you worked and how much you earned before retirement.
When Social Security calculates your benefits they first look at your annual earnings over your entire lifetime and then index the amounts for inflation to calculate the values in todays dollars. Next, the 35 highest years’ earnings are added up and divided by 35 to come up the average. This is known as the AIME (Average Index Monthly Earnings). If you don’t have 35 years of earnings, the missing years will be filled in with zeroes.
Next they determine your Primary Insurance Amount (PIA) that will be payable at your Full Retirement Age (FRA). It’s a bit complicated, but just so you know, here’s how it’s calculated. After determining your average earnings over 35 years, then 90% of the first $885 is allowed, then 32% of the amount between $885 and $5336, and finally 15% of the amount above $5336. The three values are added up to determine your PIA.
Many people may wonder what is the maximum amount that they can receive?
Assuming they had maximum earnings for all 35 years, in 2017, a 62 year old would receive $2,153, a 66 year old would receive $2,687, and a 70 year old would receive $3,538.
What about a minimum benefit?
If a worker has had low wages throughout their lifetime, and has worked 35 years the least one can receive is $832.20 which is 20% below the federal poverty level. This is known as the Special Minimum Primary Insurance Amount. For workers with fewer years of work history the amount decreases.