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How Are Social Security Benefits Calculated? Several Points And Aspects Having Effect On The Benefits
One of the most popular Social Security questions that I hear from baby boomers getting ready to retire is "how are Social Security benefits calculated?" This is a crucial question since it could affect how long you require to work, whether you should continue to work during your retirement years, or any other aspects of your retirement plan.
First, please note that you receive a Social Security retirement benefit estimate each year in the mail, usually near your birth date. There're also a few calculators available on the Social Security website to assist you estimate how much your retirement benefits will be, so you don't need to know how to calculate the benefit yourself.
It's still advantageous to know how Social Security is calculated, but, so here are the principles:
Basically, your highest 35 years of earnings are indexed for inflation, then averaged to determine the basis for your monthly benefit. If you worked less than 35 years, the missing years will be calculated as nothing for purposes of determining your benefit amount.
Planning suggestion: If you've close to 35 years of earnings and you're close to retirement, you will benefit greatly by continuing to work until you have 35 full years of earnings to include in your benefit calculation. The majority of people it'll affect are females who took time off work to raise a family.
The top 35 years of earnings are then divided by 35 to get your average indexed monthly earnings (AIME). A formula is applied to your AIME to determine your primary insurance amount (PIA). We won't go into the specifics of the formula; the important thing to notice is that your Primary insurance amount is the completely unreduced benefit you would receive if you retired at your full retirement age (at the age of 66 for people born between 1943 and 1954). This amount will be reduced if you take early retirement or increased if you retire after age 66.
The PIA is also the basis for other benefits like spousal benefits, thus it is significant to understand that your Primary insurance amount is not necessarily the same amount that you will receive. If you are married and your spouse will be collecting benefits based on your earnings rather than her own, then you might need to maximize your own PIA to maximize the total Social Security benefits you & your spouse will receive.
How You Will Go With Social Security Survivor Benefits After Your Spouse Passes Away
When Social Security was first established, it only paid retirement income to workers who qualified. It was later amended to include benefits for spouses and survivors, which made it more of a family or insurance plan, instead of just a retirement plan.
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Present Condition About Social Security Spouse And Survivor Benefits
When Social Security was established most women did not work. Lower or no earnings combined with a longer life span meant poverty for many women when their husbands passed away. Social Security recognized these challenges and have implemented several changes to the system to help women avoid poverty.
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Submitting Your Social Security Application: When And How
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