“We can never insure one-hundred percent of the hazards and vicissitudes of life. But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” —Franklin D. Roosevelt
As we continue to cover the basics of Social Security retirement benefits another key concept for you to understand is the Primary Insurance Amount, also referred to as your PIA. The PIA is a significant calculation since all your benefits are computed from this amount, not just retirement benefits. While the calculation of your PIA is complicated. the good news is that the Social Security Administration will determine it for you.
The process for arriving at your PIA involves three steps. In the first step, the administration reviews your highest 35 years of “covered earnings” (income on which you paid Social Security taxes) history and applies an indexing factor. For example, if you earned $25,000 in 1980, that $25,000 will be increased for calculation purposes to reflect that amount in today’s dollars. This is done for every year you had covered earnings until the year you turn age 60. What if you had less than 35 years? If that is the case, then zero earnings are used for the missing years.
In step two the administration adds together your highest 35 indexed years of earnings (including the zero years, if you had any) and divides this amount by 420 (number of months in the 35 years of indexed earnings) to arrive at your Average Indexed Monthly Earnings or AIME. A formula is then applied to this AIME amount to calculate your PIA.
For an individual who first becomes eligible for retirement benefits in 2018, the formula for determining his or her PIA will be the sum of:
(a) 90 percent of the first $896 of his or her average indexed monthly earnings, plus
(b) 32 percent of his or her average indexed monthly earnings over $896 and through $5,399, plus
(c) 15 percent of his or her average indexed monthly earnings over $5,399.
To clarify, let’s run through an example. For this exercise, we will assume the AMIE for this individual is $6,000 at full retirement age. The PIA would be calculated as follows:
|$4,503 ($5,399 – $896)||Times 32%||1,440.96|
|$601 (6,000 – 5,399)||Times 15%||90.15|
* This amount would be rounded down to the next whole $.10.
For this individual, the PIA would be $2,337.50 at his or her full retirement age and all benefits would be calculated from this amount. The effect of the above calculation is that it provides a greater percentage of PIA for those with a lower AIME. It gives a larger percentage of income replacement and a greater safety net to those with lower incomes throughout their lifetimes.
I caution you, though, that I have covered here only the main rules for arriving at the Primary Insurance Amount. There are several specials rules that can apply to any specific situation such as the reduction in benefits if you were at any time in your career covered by a government pension.
I would also encourage you to go online and review your account. If you don’t have an online account set one up, simply go to SSA.gov, click on my Social Security and then click on Create an Account. The information available to you at the SSA.gov website, the personalized data from your online account and the information covered here will be valuable as you plan out the financial side of your amazing, kick-ass retired life.
“The question isn’t at what age I want to retire but at what income. —George Foreman
Enjoy your journey!
Gary A. Weuve, CFP®
Founder and CEO
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