The Social Security Benefits Calculation Guide for 2022

Social Security benefits may be a significant component of your retirement strategy. The amount of Social Security payments you will receive is determined using a three-step method.

Step 1: Determine your average earning history 

Step 2: Determine your primary insurance amount (PIA) 

Step 3: Determine your actual Social Security benefit 

1. Calculate your average earning history 

The first stage is to evaluate your average lifetime income. It’s not as easy as just averaging your profits after summing up all your earnings. The calculation must take into account several constraining factors.  

Only earnings that you paid Social Security taxes on will be counted against your lifetime earnings. The computation will not consider incomes that, for instance, were not subject to Social Security taxation throughout your lifetime. 

The yearly cap for Social Security taxes is $147,000 in 2022 ($142,800 in 2021). Only $147,000 of your 2022 employment income, for instance, counts in the computation of your lifetime Social Security earnings. The sum over $147,000 is not subject to taxation or factored into the computation of lifetime earnings. 

2. Calculate your primary insurance amount 

You’ll include your average indexed monthly earnings (AIME) into a formula to get your main insurance amount, or PIA, after calculating your AIME. The foundation of this formula is a concept known as “bend points.” 

The PIA is the value that your Social Security payment would be if you applied for benefits to start at precisely the time when you would be eligible for retirement (FRA). Your PIA is multiplied by a growing or decreasing factor at any other age, even a month before or a month beyond your full retirement age, to calculate your benefit amount. 

We must first determine which bend points, based on your age, apply to you in order to compute your PIA. Bend points are chunks of your AIME, and your PIA is calculated by multiplying the sum of each bend point by a particular percentage. 

Based on numbers that were first calculated in 1977, bend points are calculated for each year. The bend points in 1977 were $180 and $1,085. Over the years, these bend points have been adjusted annually; as a result, the bend points for 2022 are $1,024 and $6,172. The bend points for 2021 were $996 and $6,002. The year you turn 62 represents the beginning of your situation’s curve. 

3. Calculate your actual Social Security benefit 

We can determine your actual Social Security benefit using the PIA. The age you are when you start receiving Social Security payments in relation to your full retirement age, or FRA, is the additional element besides the PIA. 

Your benefit will be the same as your PIA if you petition for Social Security payments to begin at your FRA. Your Social Security income will be deducted from your PIA for each month before your FRA. In contrast, your Social Security pension will be enhanced from your PIA for each month following your FRA, up to the age of 70. 

The reductions for filing early are in relation to your FRA. The PIA is decreased by five-ninths of 1%, or 0.556%, for each of the 36 months leading up to your FRA. The decrease is 20% if benefits are started a full 36 months before FRA. 

A further five-twelfths of 1%, or 0.417%, is subtracted from the PIA for each month that is more than 36 months before the FRA. Therefore, the extra reduction is 5% for every full year (12 months) that you submit less than 36 months before the FRA. 

For each month that Social Security benefits are delayed beyond FRA, the delayed-filing increases (two-thirds of 1%) are computed. Your Social Security payment is determined by adding 8% to the PIA for each full year of delay. 

Your FRA is defined by your birth year. Your FRA is 66 if you were born between 1946 and 1954. The FRA is extended by two months for each year following 1954. The FRA is 67 for those born in 1960 or after. 

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Bio:
Todd Carmack grew up in Dubuque, Iowa, where he learned the concepts of hard work and the value of a dollar. Todd spent years in Boy Scouts and achieved the honor of Eagle Scout. Todd graduated from Iowa State University, moved to Chicago, spent a few years managing restaurants, and started working in financial services and insurance, helping families prepare for the high cost of college for their children. After spending years in the insurance industry, Todd moved to Arizona and started working with Federal Employees, offing education and options on their benefits. Becoming a Financial Advisor / Fiduciary can help people properly plan for the future. Todd also enjoys cooking and traveling in his free time.

Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.