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Our tool helps you understand what your annual Social Security benefits will look like in retirement. Social Security benefits in retirement are impacted by three main criteria: the year you were born, the age you plan on electing (begin taking) benefits and your annual income in your working years. First we take your annual income and we adjust it by the Average Wage Index (AWI), to get your indexed earnings. This is done to account for the rise in the standard of living during your working years. Then we use the average of your highest 35 years of indexed earnings to calculate your Social Security benefit at full retirement age. Considering when you were born and at what age you want to begin receiving Social Security benefits, we determine how much you can expect to receive at your desired retirement age.
Annual Income: We assume that your income in the future increases by the rate if inflation and your income in the past is discounted by the same inflation rate
Indexed Earnings: We use the Social Security Administrations National Average Wage Index to index wages for the social security benefit calculation
Working Years: We assume that you have worked and paid Social Security taxes for 35 years prior to retirement
Benefits After Election: We assume that your Social Security benefits grow at the rate of inflation once you have elected them
Calculate My Social Security Income
At SmartAsset, we’re all about saving for retirement. We’re not saying you shouldn’t plan on getting Social Security benefits, but we are saying you shouldn’t plan on living exclusively off your Social Security benefits. These days there’s a lot of doom and gloom about Social Security’s solvency, or lack thereof. Luckily, a Social Security income calculator allows you to have an estimate of your benefits.
Remember that Social Security benefits were never designed to make up a retiree’s entire income. Instead, they were meant to complement employer pensions and private savings. Of course, many people do find themselves in the position of having to live off their Social Security checks, but it’s best to do what you can to make sure that’s not you.
Who is eligible for Social Security benefits?
Anyone who pays into Social Security for at least 40 calendar quarters (10 years) is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age (between 66 and 67, depending on when you were born), but if you wait until age 70 to claim your benefits you’ll get a credit for doing so, with larger monthly benefits. If you claim after age 62 and before your full retirement age, the Social Security Administration will dock your monthly benefits.
How does the Social Security Administration calculate benefits?
The Social Security Administration takes your highest-earning 35 years of covered wages and averages them, indexing for inflation. They give you a big fat “zero” for each year you don’t have earnings, so people who worked for fewer than 35 years will see lower benefits.
The Social Security Administration also makes annual Cost of Living Adjustments, even as you collect benefits. That means the retirement income you collect from Social Security has built-in protection against inflation. For many people, Social Security is the only form of retirement income they have that is directly linked to the Consumer Price Index. It’s a big perk that doesn’t get a lot of attention.
Is there a maximum benefit?
Yes indeed. The Maximum Social Security Benefit changes each year. For 2015, it’s $2,663/month. Multiply that by 12. If the number you come up with is less than your annual expenses, start saving for retirement pronto, if you haven’t already.
What if I continue working in my 60s?
Many people whose health allows them to continue working in their 60s and beyond find that staying in the workforce keeps them young and gives them a sense of purpose. If this sounds like something you’d like to do, know that working after claiming early benefits may affect the amount you receive from Social Security. Why? Because the Social Security Administration wants to spread out your earnings so you don’t outlive them. If you claim Social Security benefits early and then continue working, you’ll be subject to what’s called the Retirement Earnings Test.
If you’re between age 62 and your full retirement age and you’re claiming benefits, you’re subject to a specific Earnings Test Exempt Amount, a threshold that changes yearly. For 2015, the Retirement Earnings Test Exempt Amount is $15,720/year ($1,310/month). If you’re in this age group and claiming benefits, for every $2 you make above the Retirement Earnings Test Exempt Amount, $1 in Social Security benefits will be withheld.
Contrary to popular belief, this money doesn’t disappear. It gets credited back to you—with interest—in the form of higher future benefits. You may hear people grumbling about the Social Security “Earnings Tax”, but it’s not really a tax. It’s a deferment of your benefits designed to keep you from spending too much too soon.
Only income from work counts for the Earnings Test. Translation: earning more than the exempt amount in capital gains and pensions won’t count against you.
And after you hit your full retirement age, you can work to your heart’s content without any reduction in your benefits.
Are Social Security benefits taxable?
If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits won’t be taxed at all. This is done on a sliding scale.
You can ask Social Security for an IRS Voluntary Withholding Request Form if you’d like the government to withhold taxes from your Social Security benefits. Where do those taxes go? Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.
That covers federal income taxes—what about state income taxes? That depends. Some states tax Social Security benefits as part of income, while others don’t, or only tax a portion of your benefits. A good Social Security benefits calculator will take this into account so you can more accurately estimate your future income.
As you approach retirement, keep track of your expenses so you know how much income you’ll need to maintain your current standard of living. While conventional wisdom says you don’t have to plan on replacing 100% of your salary in retirement income, once you factor in the high costs of medical care in your dotage, you may find that you really do need just as much money as you did while you were working. Our advice? Aim high and save what you can.
It’s a good idea to check back with a Social Security retirement income calculator periodically throughout your career. That way, you can see whether you’re saving enough for retirement in other ways (401(k), IRA, etc.) to round out the money you can expect from Social Security.
As with everything we say about retirement, the trick is to contribute to your retirement accounts early and generously—and not get overwhelmed by the mountain of money you’ll need to save. Baby steps.
Places Social Security Goes Furthest
SmartAsset’s interactive map highlights the counties in the country where Social Security benefits will cover the most of a person’s cost of living after paying taxes. Hover over counties and states to see data points for each region, or use the map’s tabs to view the top counties for each of the factors driving our analysis.
Methodology Contemplating where to spend your retirement years? While it’s certainly advisable to have some retirement savings of your own to help pay for your golden years, if you will be relying mostly on Social Security benefits, this study can help. We analyzed where in the US Social Security benefits will go the furthest.
First, we looked at the average Social Security income for each county. Then we calculated the taxes a typical retiree would pay on that income based on the state-specific Social Security tax rules. We subtracted the taxes from that average Social Security income to determine the net income from Social Security.
Next, we calculated how far that net income would go in every county to cover the basic necessities. We subtracted the county-level cost of typical living expenses from each county’s net Social Security income. Finally, we indexed the results to 100, with 100 showing where Social Security would cover the most needs. Higher scores reflect a better environment for living primarily or exclusively off of Social Security benefits.
Sources: MIT Living Wage Calculator, US Census Bureau 2013 American Community Survey, Kiplinger, state government websites