A pen and calculator sitting on top of financial documents as someone calculates their Social Security benefits.

How to Calculate Your Social Security Benefits

For most working Americans, retirement is something to both look forward to and be apprehensive about. The biggest concern most people have as they approach retirement is whether they will have enough money to live comfortably in their golden years. This is where Social Security steps in to help. Whether a person retires a few years early or continues to work well past normal retirement age, Social Security benefits will be waiting for them down the road. However, as retirement approaches, it's a good idea to know the correct way to calculate your Social Security benefits.

First Things First

In order to calculate your Social Security benefits, you'll need your latest Social Security benefit statement. Available online at the Social Security website or through standard mail, the benefit statement shows your annual earnings that have been accumulated over the course of your working life. From your first job to your current job, all money earned from these jobs is used to calculate your retirement benefits. The benefit statement will show your estimated Social Security benefit if you retire early at age 62, if you wait until normal retirement age, or if you choose to work until age 70 or beyond.

Next, you'll use Social Security's index factor to figure out just how much money you will be entitled to when you retire. Although the benefit statement provides payment figures, these are only estimates and are subject to change. The index factor is important to use when calculating your earnings because it takes into account such factors as inflation and cost-of-living. The downside of these factors is the money earned later on in your working life is worth much less than what was earned in earlier years.

How to Calculate Benefits

To properly calculate your benefits, take the highest earnings from a 35-year period and add them together, then divide the total by 420, which is the total number of months within a 35-year period. The number you arrive at after doing this is considered your average indexed monthly earnings, and is the number Social Security will use to calculate your monthly retirement benefits. A calculator tool on the SSN website will do this for you.

When Your Retire Affects Your Benefits

As stated earlier, all this is subject to change if you earn more or less money during your working life. For example, your benefit amount will be substantially reduced if you choose to retire early. When you retire early, Social Security will cut your monthly benefit by just over one-half of one percent for the months that stand between you and standard retirement age. Therefore, if you choose to retire two years before full retirement age, your monthly benefit gets reduced by over 13 percent. However, if you choose to do the opposite and retire later than most, you will receive a delayed retirement credit of up to eight percent for each year you delay taking Social Security until you reach age 69.

The decision to retire is a highly personal one that takes a lot of consideration. It is a big life decision that should not be entered into without an understanding of what to expect financially. Planning ahead and calculating your benefits well before retirement arrives will make the entire process much easier.

Last Updated: July 31, 2014