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Until you decide to retire, you can only estimate how much your Social Security benefits will be. That’s because your benefit amount depends on the lifetime total of earnings on which you’ve paid Social Security taxes, and on the age at which you begin taking benefits. However, making an estimate is worthwhile because the information will help you plan for your retirement.
The Social Security Administration figures your benefit amount based on your full retirement age, which is 66 if you were born before between 1943 and 1954. The full retirement age increases gradually until it reaches 67 for people born after 1959. Determining your benefit amounts starts with indexing your earnings for every year you’ve paid Social Security taxes. Indexing means your earnings are multiplied by a factor that adjusts for changes in average wages over time. Suppose you earned $12,000 in 1975. As of 2013, you would multiply this by a factor of 4.98, giving you an adjusted income of $59,760. Once each year’s earnings are indexed, add up the amounts for your 35 years of highest adjusted income. Divide the total by 420 to find your average monthly indexed earnings.
As of 2013, the Social Security Administration calculates your monthly benefit amount by multiplying the first $791 of your average monthly indexed earnings by 90 percent. The amount between $791 and $4,768 is multiplied by 32 percent. If your average monthly indexed earnings are more $4,768, the excess is multiplied by 15 percent. The results are added together to determine your monthly Social Security benefit.
Starting Benefits Early
The Social Security Administration allows you to start drawing retirement benefits as young as 62. Because starting early means you'll collect benefits for a longer period, the monthly amount is reduced. Your benefit check is lowered for each month you begin receiving benefits early. If you start the month you turn 62, your benefit amount will be 25 percent less than if you'd waited until 66.
You can increase your benefit amount by waiting to start receiving Social Security benefits. As of 2013, the monthly amount you get will increase 8 percent if you wait until you turn 67, and an additional 8 percent for each year you wait until 70. By deferring benefits until 70, you get a maximum increase of 32 percent over your benefit at normal retirement age.