If you are approaching retirement age, you are likely quite curious about just exactly how much you can expect to receive in social security benefits. Up until now, you may have believed that the formula used by the Social Security Administration to calculate benefits was so intricate and esoteric that it would take a team of professional mathematicians several years to figure it all out.

In fact, the formula for estimating social security benefits does involve some basic mathematics, but it is not overly complicated and anyone can do it in a few simple steps if they have the information they need. While it may be all but impossible for those who are still decades away from collecting social security to estimate what they will receive because of uncertainties about future income, if you are in your mid-to-late 50s or older you should be able to get a pretty good idea.

The Social Security Administration does send out a yearly statement that estimates future benefits for you, and in the past they have also made this statement available by request online. The latter service has now been suspended, however, so if you do not want to wait until your next statement arrives in the mail – or if you just want to see for yourself how they make their estimates – you can use the formula outlined here to help you calculate the future social security benefits you can expect to receive.

Your Average Indexed Monthly Earnings

Before you do anything else, you should visit the Social Security Administration website at ssa.gov and find the page with an electronic fact sheet called “Your Retirement Benefit: How it is Figured.” You will need this worksheet in order to perform your calculations.

The first thing you will need to know is your average indexed monthly earnings, or your AIME. What you will need is your total earned income figures (the money you earned that was subject to taxation) from each year throughout your working life.  If you do not have complete records of your income earnings, you can contact the Social Security Administration and they will provide this information for you. Once you have all of these figures you can list them on your worksheet under the earned income column. You will want to select the 35 years that have the highest level of compensation, as these will be used to calculate your AIME. If you have fewer than 35 years of working experience, just use as many years as you have. One stipulation is that your actual earned income number cannot be higher than the maximum earnings figure listed on the left of the worksheet. Income is only taxed for social security up to a certain point (the number for 2011 is $106,800) and anything after that was exempt from taxation – so only income earned up to the maximum level for each year can be used for the purposes of these calculations.

Next, these figures must be adjusted to account for inflation over the years. What you need to know is the National Average Wage Index number for each year in which you had earned income. This number is available on your worksheet, and as you can see it has changed significantly over time. Indexing only occurs on income earned up to the age of 62, so anything earned after that will not be adjusted if included in your calculations. Now, it is simply a matter of multiplication to find your indexed income numbers for the 35 years of highest compensation. Once you have performed this operation on your calculator (or on paper if you are adventurous), you add the 35 or fewer chosen indexed income figures together, and then you divide this number by 420, which is the number of months in 35 years. Whatever this final total is, that is your AIME. Unfortunately, if you worked fewer than 35 years you still must divide by 420, as social security benefits always use that 35-year baseline to calculate awards.

Calculating Your Primary Insurance Amount

With your average indexed monthly earning number in hand, you will now need to find out what percentage of that figure you can expect to receive as a social security benefit, and this final amount is known as the primary insurance amount, or PIA.

The first $749 of your AIME will be compensated at 90%  – which is $674.10 if your AIME surpasses that $749 level. Average indexed monthly earnings that fall between $749 and $4,517 will be compensated at a rate of 32% – so if your AIME was $3,000 for example, you would subtract 749 from 3,000, then multiply that number by .32 (which in this case would come to $720.32). For any money earned above the $4,517 mark, that would be compensated at a rate of 15%. So potentially, you could have three different numbers calculated with three different percentages to add together in order to calculate your PIA. This final total is the amount of social security benefits you could expect to receive monthly, if you retired at your designated retirement age.

But Wait…

We have just used an important phrase – designated retirement age. If you were born between 1943 and 1954, that age is 66. This age changes by two-month increments either forward or in reverse from this baseline. So if you were born in 1955, it would be 66 and two months, up to 1960 when it reaches 67 and stops. In the other direction, the retirement age would be 65 years and ten months for those born in 1942, continuing on down until it reaches 65 and declines no further. So everyone’s designated retirement age will fall somewhere between 65 and 67.

Early retirement after the age of 62 is always an option. However, anyone choosing early retirement will have their benefits reduced by 5/9ths of 1% for each month they are below the designated retirement age for the first three years, and by 5/12 of 1% for each extra month beyond that. What this means is that a person retiring three years early will see a 20% reduction in benefits, and a 25% reduction if they quit working four years early.

On the other hand, there are rewards for postponing retirement beyond the designated age. For anyone born in 1943 or later, delayed retirement benefits (extra money) are added at a rate of 2/3 of 1% per month, or 8% per year. So if you retire 6 months later than your designated full retirement age, your PIA would increase by 4%. Those born before 1943 who delayed retirement may be collecting extra benefits at a somewhat lower rate. Delayed retirement benefits will no longer accrue once a worker has reached the age of 70.

Spousal Benefits

Spouses who did not work outside the home or who earned a low salary are eligible to receive benefits at half the rate of their marriage partner, if they are past the full retirement age. If a husband or wife would like to begin collecting spousal benefits at 62, they can get 37.5% of their working partner’s benefits if the spouse’s full retirement age is 65; 35% if it is 66; and 32.5% if their full retirement age is 67. If a spouse worked and is eligible for benefits on his or her own in addition to having spousal eligibility, he or she will receive a monthly social security check that is equivalent to the higher of the two potential amounts. If the working partner chooses to retire early, spousal benefits will be reduced by 5% more than those of the early retiree. So if a husband retires three years early, for example, while their benefits are cut 20% the benefits of their non-working spouse would be reduced 25% from the previously expected amount.

2+2=4

Calculating your expected social security benefits, and the benefits of your spouse, is really just a matter of simple mathematics. It may take you some time to do the work; but once you are finished with the calculations you will have a very good idea of what you and your life partner can expect to receive from social security once you have left the working world and moved on to the next phase in your life.