Almost everyone who works in the U.S. pays money to the Social Security system. Unfortunately, the vast majority of workers have no idea how much they will get back when they retire.
Here are the important details to understand about how you qualify, what you qualify for, and how to calculate your social security checks.
How to Qualify For Social Security
Most Americans who work at a paying job during their lifetime will receive some sort of Social Security benefit. The exact age at which you are eligible to begin receiving payments will depend on your year of birth—those born before 1943 are eligible at 65, those before 1960 at 66, and anyone later at 67. You may choose to receive a reduced payment as early as 62.
When you work, you receive credits to determine your eligibility. You get a maximum of four credits per year and you need a total of forty credits over your lifetime to receive some sort of benefit. In order to get the maximum four credits for the year, you need only $4,520 in wages. So, for example, an individual who makes just $4,520 per year for only 10 years of their life will receive social security payments.
How the Social Security Administration Calculates Your Payments
Each year, the Social Security Administration calculates your Social Security earnings. These earnings are roughly equivalent to the wages you report on your income tax return, but there are limits for high earners (the 2012 limit is $110,100). The SSA only looks at the 35 years in which you earned the most. If you did not work for a total of 35 years, the remaining years are calculated at zero.
Next, they adjust each year’s earnings for inflation to determine the approximate value in “today’s dollars.” These indexed earnings are totaled and then divided by 420 (the number of months in 35 years) to determine the average monthly income over your lifetime.
Lastly, your average monthly income is multiplied by several factors to determine your monthly benefit after you reach 65. This value is referred to as your Primary Insurance Amount (PIA). If you choose to begin taking social security benefits early at 62, the monthly benefit is reduced by 25%.
How to Estimate Your Social Security Payments
Because your benefit is based on your earnings up until you retire, you can only estimate what your benefits will be. The closer you are to retirement, the more accurate the estimate will be. The government offers a couple of methods to determine what your particular benefit will be.
If you have already reached retirement age, you can fill out a simple worksheet at the following link:
For those who have not yet retired, the government offers a retirement calculator to estimate your benefit. The good thing about this calculator is that it takes into account the information that the government has already recorded for you along with some assumptions as to your future income. The calculator is available at the following link: