How to calculate your retirement in the USA: formulas and nuances

It is difficult to predict how much you will receive from social security these days, especially if you have a few years left before retirement. But becoming familiar with how your benefit will be calculated can help you plan your retirement budget and even increase your future Social Security payments. Edition Money US News explained how you can calculate your monthly Social Security income.

Consider the average social security payment

In January 2021, the average Social Security benefit was $ 1543 per month. The maximum possible Social Security benefit for those retiring at full retirement age is $ 3148 in 2021.

However, an employee will have to earn a maximum taxable amount, which is currently $ 142 for 800 over a 2021-year career, in order to receive this Social Security payment.

Calculate your social security payment

Social Security payments are based on the 35 years of your highest earning career and are adjusted for inflation. If you have worked for more than 35 years, the lowest income years are excluded from the calculation, resulting in higher pay. Those who have been unemployed for 35 years have, on average, zeroes in their social security calculations and receive lower benefits.

“When it's time to calculate your benefit, the Social Security Administration will look at your highest income in 35 years, and earnings up to your 60th birthday are indexed for inflation. ... This means that while your earnings may have increased over your entire career, the money you made this year may not be one of the highest post-indexed earnings, ”says Jim Blankenship, Certified Financial Planner at Blankenship Financial. Planning in New Berlin, Illinois, author of The Social Security Owner's Guide.

For an employee who qualifies for Social Security benefits in 2021, the amount of the benefit is calculated by multiplying: the first $ 996 of the average indexed monthly earnings - by 90%; the remaining income up to $ 6002 - by 32%; earnings over $ 6002 - by 15%.

On the subject: Three main types of retirement in the USA: what you need to know about social security in America

The total of these three amounts, rounded to the nearest 10 cents, is the original payment amount. A living wage adjustment and deferred retirement loans can significantly increase your payments.

Social Security Retirement Age Factor

Your age when you start receiving Social Security plays a large role in the amount you pay. Monthly social security benefits are reduced if benefits are claimed before full retirement age.

This age is usually 66 or 67, depending on your year of birth. You can increase your monthly payments for each month that you defer to apply between your full retirement age and your 70s.

Married couples have more options to apply. Married persons are entitled to Social Security benefits equal to 50% of the higher paid spouse's benefit if it is greater than the benefits based on their own seniority.

Spousal benefits are reduced if you claim them before you reach full retirement age. In addition, you can apply for payments on the basis of the work book of the ex-spouse. You are eligible if the marriage has lasted for at least 10 years.

One of the spouses can claim a survivor benefit if the higher paid spouse dies first. Couples must coordinate when they demand payment. This will maximize their benefits as a married couple and potentially be eligible for higher benefits for the surviving spouse.

Subtract Medicare Premiums

For many retirees, Medicare Part B premiums are deducted from Social Security checks. The standard Medicare Part B premium is $ 148,50 and is prohibited by law to reduce Social Security benefits for existing recipients.

Part B of the premium increase program must not exceed your annual Social Security cost of living allowance.

“Some people may face a loss of their Social Security check not because of the Part B premium, but because of the premium for the Part D drug,” said Trisha Neumann, director of the Health Care Policy Program at the Kaiser Family Foundation. "The Part D program does not provide for safe containment." Medicare Part D premiums depend on the plan you choose. You have the right to change plans every year during the open enrollment period.

Remember to withhold income tax

Many retirees have to pay income tax on their Social Security payments. This rule is especially important for those who have other sources of retirement income.

“If social security is your only source of income, you pay no taxes on it,” says Dana Anspach, certified financial planner and CEO of Sensible Money in Scottsdale, Arizona.

“If you have other sources of income, then that income is accounted for by the IRS formula, and the result is anywhere from zero to 85% of your Social Security taxable benefits. Other sources of income could be: pension, IRA withdrawals, part-time work, interest and dividends. ”

On the subject: Comfortable retirement in the USA: 8 tips on how to live comfortably on social security

You can choose to withhold income tax of 7%, 10%, 12%, or 22% on your Social Security payments.

Create a My Social Security account.

You can get a personalized estimate of your future Social Security benefits when you apply. This can be done at different ages by creating a Social Security account.

These estimates are based on your actual earnings. They are usually most accurate for those approaching retirement age. Your grades can change from year to year, especially if you have significant wage changes or gaps in your income history.

“Creating a social security account allows you to see your most recent Social Security statement. It also lists your annual reported income, your full retirement age, estimated retirement age, disability, family benefits, and more, ”says Angie Furubotten-LaRosi, a certified financial planner at Avea Financial Planning in Richland, Washington. ...

"You will need to review your income history every couple of years to make sure there are no errors and keep track of your projected retirement benefits."

You can also use the Social Security Calculator to determine the optimal age to sign up for benefits based on your personal situation.