Surprising Social Security Calculation Facts

Most retirees think they understand Social Security, but when you dig into the details, it’s full of surprises. And if you’re not careful, you could leave thousands of dollars on the table.

For the most part, your benefit is based on your highest 35 years of income. But here’s the twist—if you worked less than 35 years, it could reduce your average earnings. However, it might not be as much as you'd think due to the way earnings are indexed.

Think working extra years will massively boost your benefit? Maybe not. If you already have 35 high-earning years, more work won’t change much—unless those years replace lower-income ones.

Retiring early sounds nice but claiming Social Security early can reduce your benefit by up to 30%! On the flip side, waiting until age 70 could boost your benefit by up to 24%! Let’s talk about how the Social Security Administration actually calculates your benefits.

To figure out your Social Security retirement benefit, the Social Security Administration starts by calculating something called your AIME—Average Indexed Monthly Earnings. Your past earnings are adjusted for wage inflation, not consumer prices. That means those low-paying jobs in your twenties might count for more than you'd expect. They use the average wage index (AWI) to calculate what the equivalent earnings would be today.

Next, the Social Security Administration uses something called “bend points” to calculate your benefit. In short, the bend points credit your primary insurance amount (PIA) in three different segments: one at 90%, the next at 32%, and the final at 15%. This is credited like marginal tax brackets but inverted. The first bend point segment gives you more benefit than the last bend point segment. This effectively gives more Social Security benefits to lower-income earners.

And here’s a bonus surprise—if you keep working while claiming benefits before your full retirement age, your check could be reduced. But once you reach full retirement age, you can earn as much as you want, and your benefit might even increase if your new income beats old years.

As an example, let’s assume our pal Max Benny and his wife Minny are both the same age and applying for Social Security. Because Minny was a stay-at-home mom for many years, her average income for Social Security is half of Max’s income. However, once the bend points are applied, instead of getting half the benefits of Max, Minny’s benefits are actually equal to 73% of Max’s. Pretty surprising, right?

Bottom line, Social Security calculations are more complex than most people realize. The best way to maximize your benefit is to build a retirement strategy which incorporates your full financial picture.

Need help creating your plan? Let’s talk. Contact NextGen Wealth today to see if we’re a good fit and request your retirement checkup!

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