Social Security is a major source of income for most American seniors. However, many current and future Social Security beneficiaries don’t know some important details about how the program works. With that in mind, here’s your 2018 guide to help you understand Social Security benefits, how to claim yours, and what to expect going forward.
How Social Security is calculated
First of all, to be eligible for a Social Security retirement benefit, you need to have worked for a certain minimum amount of time.
Specifically, you’ll need at least 40 Social Security credits to collect a benefit on your own work record. The amount of earnings that is necessary for one credit has increased over time, and is $1,320 in 2018. You can earn a maximum of four Social Security credits per year, so this means that you’ll need to have earned $5,280 (inflation-adjusted) in each of 10 or more years.
Assuming you’re qualified, Social Security will evaluate your entire lifetime earning record to determine your initial monthly benefit. Each year’s earnings, up to the Social Security taxable maximum, is indexed for inflation, and the 35 highest years are considered. If your work history has fewer than 35 years, the missing years will be counted as zeros.
The top 35 inflation-indexed years are averaged together and divided by 12 to produce your average indexed monthly earnings, or AIME. This average is then applied to a formula to determine your primary insurance amount, or PIA, which is your initial monthly benefit at full retirement age. For 2018, the formula is:
- 90% of the first $896
- 32% of the amount greater than $896 but less than $5,399
- 15% of the amount in excess of $5,399
Full retirement age and the effects of early or late Social Security
Depending on the year you were born, your full retirement age is between 66 and 67 years of age:
|If you were born in…||Your full retirement age is…|
|1954 or earlier||66 years|
|1955||66 years, 2 months|
|1956||66 years, 4 months|
|1957||66 years, 6 months|
|1958||66 years, 8 months|
|1959||66 years, 10 months|
|1960 or later||67 years|
If you choose to start collecting your Social Security retirement benefit before or after you reach full retirement age, your PIA, which we discussed in the previous section, will be permanently adjusted to compensate according to these rules:
- If you claim before full retirement age, your PIA is reduced by 6 2/3% per year (five-ninths of 1% per month) for up to 36 months.
- Beyond 36 months early, the PIA is further reduced by 5% per year, or five-twelfths of 1% per month.
- For delayed retirement, your PIA will be permanently increased by 8% per year, or two-thirds of 1% per month, until as late as age 70.