How to Estimate Your Social Security Benefits
A guide to understanding how Social Security calculates your benefit, how to get an estimate, and how to factor Social Security into your retirement plan.
What Social Security Is Actually Based On
Your Social Security retirement benefit is based on your lifetime earnings — specifically, your 35 highest earning years adjusted for inflation (called indexing). If you have fewer than 35 years of covered employment, the missing years are counted as zero, which reduces your average and therefore your benefit.
This means working additional years and replacing earlier lower-earning years with higher-earning years continues to increase your Social Security benefit throughout your career. Each year of higher earnings replaces a zero or a lower-earning year in the 35-year average.
Only earnings on which Social Security taxes were paid count toward your record. Self-employment income is included if you paid self-employment taxes. Income from investments, inheritances, gifts, and non-employment sources does not count.
How AIME and PIA Are Calculated
The Social Security Administration calculates your benefit through a two-step process. First, they compute your Average Indexed Monthly Earnings (AIME) by taking your 35 highest earnings years, adjusting each year's earnings for wage inflation, adding them together, and dividing by 420 (the number of months in 35 years).
Second, they apply a progressive benefit formula to your AIME to calculate your Primary Insurance Amount (PIA), which is your monthly benefit at your full retirement age. The formula replaces a higher percentage of earnings for lower earners than for higher earners, making Social Security progressively more valuable relative to earnings for people with lower lifetime income.
You do not need to calculate this yourself. The Social Security Administration does it automatically based on your earnings record, which they track every year through information reported by employers and through self-employment tax returns.
How Your Claiming Age Affects the Amount
Your PIA is the base benefit you receive at your full retirement age (FRA). For people born in 1960 or later, the FRA is 67. Claiming before FRA permanently reduces your monthly benefit. Claiming after FRA increases it through delayed retirement credits.
Each month you claim before FRA, your benefit is reduced by a fraction. Claiming 5 years early at 62 results in a benefit that is approximately 30% lower than your PIA. Claiming at 64 results in about 20% less than PIA.
For each year you delay past FRA, your benefit increases by 8%, up to age 70. Claiming at 70 instead of 67 results in a benefit that is 24% higher than your PIA. The maximum claiming age for this increase is 70 — there is no additional benefit to waiting beyond 70.
Using an Estimator vs the SSA Website
The most accurate way to see your projected benefits is through the Social Security Administration's website at ssa.gov. Create a free my Social Security account and you can view your complete earnings history, see how errors or gaps would affect your benefit, and get projections at different claiming ages.
The SSA website shows your projected benefit assuming you continue earning at your current level until your claiming age. This is the most accurate projection because it uses your actual earnings record.
Online Social Security estimators from financial planning websites use your current income and approximate earnings history to estimate benefits. These are useful for quick planning scenarios but are less accurate than the actual SSA projections. For serious retirement planning, use the official SSA estimate as the foundation.
How to Factor Social Security Into Your Retirement Plan
Incorporate your estimated Social Security income as a guaranteed income floor in your retirement plan. If Social Security will provide $1,800 per month at your intended claiming age, that is $21,600 per year that does not need to come from your investment portfolio.
Subtract this guaranteed income from your total estimated annual retirement expenses. The remaining gap is what your portfolio must generate. Applying the 4% rule to this smaller gap gives you the portfolio size needed after accounting for Social Security.
Consider the impact of claiming age on your overall plan. Delaying Social Security to 70 provides the highest guaranteed income but requires you to fund retirement from other sources for the gap years between your retirement date and age 70. Whether this tradeoff is worthwhile depends on your other income sources, your portfolio size, and your health.