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How social benefits are calculated



Experts often say that the foundation of a pension plan is like a three-legged stool, with the legs of the stool being social security, employer-sponsored pensions, and personal savings.

Social security benefits will be a large proportion of monthly retirement income for many Americans, and it helps to know how the benefits are calculated.

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The first step is to determine if you are entitled to social benefits. To qualify for your full benefit, you must have achieved a certain number of points. If you were born after January 2, 1

929, you need 40 percent. (Or 10 years of work) to receive your full pension benefit.

By 2019, you will earn $ 1,360 to get a credit. You can earn up to four credits per. Calendar year. You need to earn $ 5,440 to get the full four credits.

"If you are self-employed, you earn Social Security credits the same way employees do," said certified financial planner Alexey Bulankov, vice president and portfolio manager at Mechanics Bank Wealth Management in the San Francisco Bay area.

The amount you will receive at your full retirement age ranging from 65 to 67 years depending on the year you were born is called the primary insurance amount or the PIA. [19659008] The not so secret formula

The formula for calculating your PIA is based on the average indexed monthly earnings or AIME in the 35 highest earnings years after 21 years up to the social security pay model. In 2019, the base is $ 132,900, an increase of $ 4,500 from last year. The wage basis is the maximum income with which social security contributions are to be paid.

"If a person works (fewer) than 35 years of age, missing years are filled in with zeros. If they have worked more than 35 years, only the highest earning years will be considered," says Charles C. Scott, founder and president of Pelleton Capital Management, a financial company in Scottsdale, Arizona.

Earnings from a worker's 35 highest earnings year increase at age 62 and indexed for inflation, resulting in AIME, Bulankov says.

AIME is "divided into three segments, called bend points (adjusted annually for inflation), giving you the worker's PIA," Scott says.

For example. A 62-year-old born in 1957, whose total indexed earnings during her 35 highest earnings year was $ 2.5 million would have an AIME of $ 5,952.38 ($ 2,500,000 / 420 working months = $ 5,952,38).

The first bending point, $ 926 of AIME, is multiplied by 90 percent. The difference between $ 926 and the second inflection point of $ 5,583 ($ 4,657) is multiplied by 32 percent. AIME is larger than the second bend point, so the difference ($ 369.38) is multiplied by 15 percent, giving you the third bend point.

Now let's apply this formula to find out what social security benefit it would be for our worker with an AIME of $ 5.952.38.

  • The first bend point gives her an advantage of $ 833.40 ($ 926 x 0.9 = $ 833.40)
  • The second bend point gives her an advantage of $ 1,490.24 ($ 4,657 x 0.32 = $ 1.490.24)
  • The third bend point gives her an advantage of $ 55.40 ($ 369.38 x 0.15 = $ 55.40)

The sum of these three amounts is $ 2,379.04. The benefit amounts are rounded off to the second best dime, so this worker's PIA, which is the amount she would get if she waits until she reaches retirement age (66 + 6 months) to collect social security, is $ 2,379.

Bend Items and formulas are set annually by the Social Security Administration.

Be on top of your benefits

Certain factors may change the amount you are entitled to, such as choices to receive benefits before full retirement age or delay benefits earlier in full retirement age. Government workers receiving pension benefits may not be eligible to receive social security.

You get a reduced benefit if you apply for services early and you get a higher benefit if you delay to claim benefits up to 70 years.

"Claiming Social Security Early in a Permanent Wage Reduction From What Your Benefit Would Be In Full Retirement Age," warns Greg McBride, CFA, Bankrates Financial Manager.

"It is even better that you delay social security every year after your full retirement age and until the 70s result in an increase of 8 percent – a permanent pay rise, if you want, over the benefit you would have received in full retirement age, McBride says.

Social security calculations can be complicated, but understanding how your benefit is definitely can help you plan for retirement.

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You can also estimate your benefits by using SSA's Social Security Retirem ent estimator. It's a good idea to go to the SSA website and create an account so you can get your Social Security statement online. socialsecurity.gov/myaccount to review your statement.

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