For most Americans, Social Security is a big piece of your retirement plan. This government-run system is pretty complicated and jargony. Yet future retirees need to understand how benefits are calculated and the intricacies of drawing on Social Security during retirement.

This guide is designed to break down the Social Security system as it relates to you. When you’re finished reading it, you will understand how your Social Security benefits are calculated. You’ll understand when you’ll be eligible to take benefits. We also cover how you might increase your benefits and when you should consider drawing on your Social Security benefits.

Overview of How Social Security Benefits are Calculated

Let’s start with the most complex part of Social Security: how benefits are calculated.

If you know much about Social Security, you probably know that it’s not hard to qualify for benefits. Because the Social Security program was set up to help lower-income workers during and after the Great Depression, the bar to qualify for Social Security is set fairly low.

Social Security skews its calculations to help lower-income workers. These individuals likely can’t save for retirement on their own, more than higher-income workers. In other words, a lower-income worker will see a greater percentage of lifetime income returned in Social Security checks.

A person making $50,000 a year could count on a bigger benefit check than a person making $25,000 a year. The difference between a person making $50,000 a year and a person making $100,000 a year won’t be as significant.

All of this can be confusing. But when we look at the calculations for Social Security benefits, things can clear up.

Minimums to Qualify

Qualifying for Social Security benefits is based on credits. Credits show that you earned a certain amount of money during your working years.

To earn one credit, you need to make $1,360 during a working year. You can earn up to four credits per year (even if you earn tens of thousands of dollars).

According to The United States Social Security Administration:

“Each year, the amount of earnings needed for credits goes up slightly as average earnings levels increase. The credits you earn remain on your Social Security record even if you change jobs or have no earnings for a while.”

If you were born after 1929, you need 40 credits over a lifetime to qualify for Social Security benefits.

So if you earn at least $4,000 a year and work 10 years, you’ll qualify for Social Security benefits.

Now, your credits don’t have anything to do with how much Social Security income you can expect. They’re just the basic bar to cross to ensure that you contributed at least something to the Social Security system.

Averaging Your Earnings

The amount of your Social Security benefit check is determined by your lifetime income average. The Social Security Administration keeps track of your annual income and Federal Insurance Contribution Act contributions each year you work.

You can find all this information on your W-2 forms and other earned-income-related forms.

When you’re ready to draw on Social Security, the SSA averages your earnings over your 35 highest-paying years of work. Then, the SSA plugs that number, along with your age, into a formula. The formula determines what your monthly Social Security check will be.

If you work fewer than 35 years, the SSA fills in the off years with zeros, bringing down your average. So, if you worked 32 years, they’ll add each year’s earnings plus three zeros and divide the total by 35.

If you work for more than 35 years, the SSA will use your 35 highest-earning years. This is why it’s good to work at least 35 years before drawing on Social Security benefits.

Earnings Limits

The Social Security Administration counts all of your taxable earnings each year up to a set limit. In 2021, the maximum taxable earnings ceiling is $142,800, and that ceiling generally increases every tax year at the discretion of the government.

While you’ll still pay income taxes on any earned income over $142,800, you won’t pay FICA taxes on that income. And since you aren’t paying FICA taxes on income over $142,800, any income over that amount won’t count toward your Social Security equation.

Effectively, contribution limits keep high-income earners from getting overly-large Social Security payouts. Even if you earned $200,000 in 2021, you’d never get credit for more than $142,800 in your Social Security calculation.

Each year has its own maximum earnings amount, all the way back to when the Social Security system was started. The goal is to level the playing field, whether you were a major earner in 2021 or 1960.

Indexing Your Earnings

Before the Social Security Administration averages your 35 years of income, it first indexes those earnings. The index factor turns dollar figures from various years into today’s dollars, helping to control inflation.

Indexing factors are meant to give a more realistic picture of your earnings. For instance, the indexing factor from 1967 is 8.24, and that year’s maximum earnings is $6,600. Today, $6,600 wouldn’t be much money, but back then, it was a decent annual wage.

How do I know this? Multiply $6,600 by 1967′s index factor, which gives you $60,918–a decent amount of money for an individual to earn in 2021.

If you want to calculate your Social Security benefits, you’d need to multiply your annual earnings from each year by that year’s index factor. The closer you get to the current year, the smaller the index factor will be.

You can get your social security statement at The statement will show you your lifetime earnings and your calculated monthly benefit.

Here, you’ll find the maximum earnings and index factor chart through the current tax year.

Find Your Indexed Monthly Earnings

You can use the information above to calculate your own indexed monthly earnings (AIME) if you want. Just take these steps:

  • First, record your actual earnings for each year that you worked. If you earned more than the maximum earnings, then just write down whatever the maximum amount is for that year. If you earned nothing, write zero.
  • Next, multiply your actual income (or the maximum earnings amount) for each year by that year’s index number. Record your indexed earnings for each year.
  • Find the 35 highest-paying years (by indexed, not actual, earnings), and add up your indexed income from each of those years. If you worked less than 35 years, just add up the indexed income from each year you did work.
  • Divide that total by 420 (the number of months in 35 years), rounding down to the next lowest dollar. This figure is your average indexed monthly earnings (AIME).

Percentage of Income Replaced

The goal of Social Security is to help retirees meet their basic needs, not to help them live lavishly. To help make this happen, the Social Security Administration will replace a certain percentage of each bracket of AIME.

For 2020, Social Security will replace the first $960 of your indexed monthly earnings at the rate of 90 percent. Amounts between $960 and $5,785 will be replaced at the rate of 32 percent. Amounts over $5,785 will be replaced at the rate of 15 percent.

That seems confusing, but it’s actually pretty straightforward. Let’s say that your average indexed monthly earnings is $5,900. Here’s how you’ll calculate your monthly Social Security benefit:

  • $960 x 90% = $864
  • $4,825 x 32% = $1,544
  • $115 x 15% = $17.25
  • $864 + $1,544 + $17.25 = $2,425.25

This formula ensures that your top-level income is replaced at a lower rate, which means that lower-income earners should not get that much less from Social Security than higher-income workers.

Cost-of-Living Adjustments

As you can see from the above calculations, the Social Security Administration tries, as much as possible, to control for inflation when calculating your Social Security benefit. And the administration continues to try to control for inflation through Cost-of-Living Adjustments (COLA) each year.

In 2021, for instance, Social Security benefits will go up by 1.3 percent. Each year, the COLA is different because it’s based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the previous year.

In plain language, the CPI-W tracks the erosion of buying power in each U.S. dollar by quarter. As you well know, $1 today doesn’t buy what $1 would have bought 30 years ago. Inflation has eroded the buying power of that $1.

So by tying Social Security benefits to the CPI-W, the SSA seeks to ensure that your benefit check has roughly the same buying power now as it did five years ago or that it will have in 15 years.

The CPI-W is set each quarter by the Bureau of Labor Statistics and the Department of Labor. It’s the official, legal measure that the SSA uses to calculate COLAs.

While most years bring an increase in Social Security checks because of Cost-of-Living Adjustments, if the CPI-W shows zero inflation, then Social Security checks would remain the same next year. This is unlikely but possible.

One thing to note is that for seniors drawing Medicare, when Medicare premiums increase, the COLA can be partially or completely offset. So you’re covered by Medicare, but you don’t get that percent increase in your Social Security checks.

You can find out more about COLA, including the current year’s COLA percentage, here.

When Should You Start Collecting Social Security Benefits

One final factor in your Social Security check amount is when you decide to take benefits.

According to the Social Security Administration:

“If you start your benefits early, they will be reduced based on the number of months you receive benefits before you reach your full retirement age. If your…

  • full retirement age is 66, the reduction of your benefits at age 62 is 25 percent; at age 63, it is about 20 percent; at age 64, it is about 13.3 percent; and at age 65, it is about 6.7 percent.
  • full retirement age is older than 66 (that is, you were born after 1954), you can still start your retirement benefits at 62, but the reduction in your benefit amount will be greater, up to a maximum of 30 percent at age 62 for people born in 1960 and later.

Full Retirement Age

Full retirement age depends on when you were born. Workers who were born earlier will have a younger full retirement age than workers who were born later. The following chart from the Social Security Administration will help you find your full retirement age:

Taking Benefits Early

In some situations, you may want to take Social Security benefits early. The earliest anyone can receive Social Security retirement benefits is age 62. As noted above, the earlier you take your benefits, the less you’ll get in your monthly checks.

Here’s how much you can expect your benefits to be reduced if you take them early:

  • If you take benefits at age 62, they’ll be reduced by about 30 percent
  • If you take benefits at age 63, they’ll be reduced by about 25 percent
  • If you take benefits at age 64, they’ll be reduced by about 20 percent
  • If you take benefits at age 65, they’ll be reduced by about 13.3 percent
  • If you take benefits at age 66, they’ll be reduced by about 6.7 percent

These amounts are from the Social Security Administration, are approximate, and are based on a full retirement age of 67.

If your full retirement age is less than 67, your benefits will be reduced by less because there will obviously be a shorter time period between reaching age 62 and reaching your full retirement age.

Remember that taking your benefits early affects your Social Security checks for the rest of your life. Your benefits are permanently reduced, not just until you reach full retirement age.

Taking Benefits Late

On the flip side, if you wait longer than your full retirement age to take your benefits, your benefits will increase by a certain amount each year. The benefits increase only applies until age 70, though, so once you reach 70, there’s no more benefit in delaying your Social Security checks.

How much your benefits will increase each year depends on your birth year. This chart from the SSA will show you how much your benefits will increase.

Going back to our previous example of a person whose AIME is $5,900, let’s see how delaying retirement by months or years would affect those monthly Social Security checks. We’ll assume the person in question was born after 1943:

  • Base Amount: $2,425.25
  • Delaying Retirement one year: $2,619.27
  • Delaying Retirement two years: $2,828.81
  • Delaying Retirement three years: $3,055.12

That’s a difference of over $600 a month if this retiree puts off retirement for three years, until age 70. Clearly, this gives you something to think about when deciding whether to delay Social Security benefits.

Can You Work While Receiving Benefits?

These days, more and more retirees are working past retirement, either as entrepreneurs or in part-time jobs. Some do this because they are in excellent health and want to stay busy, while others work because they have to. If you’re 62, you could start drawing Social Security benefits while working. Between age 62 and age 67 (or your full retirement age), your Social Security benefits will be docked if you make more than a certain amount a year.

In 2021, the limit is $18,960. For every $2 you earn above that limit, your Social Security benefits will be reduced by $1. So if you make $20,000 in 2021 while drawing Social Security benefits, your benefits will be reduced by $1,180 over the course of the year.

In the year that you’ll reach full retirement age, this calculation changes slightly. In this year, you’ll lose $1 in benefits for every $3 you earn, but only until the month in which you reach your full retirement age.

Once you reach full retirement age, you can work as much as you want without having your benefits docked. But the real advantage of working while drawing Social Security benefits is that the amount that is deducted between 62 and full retirement age is added back to your Social Security checks once you reach full retirement age.

This gets much more complex if you retire midyear or if you’re self-employed, so it’s worth talking to a knowledgeable adviser if you’re self-employed, considering starting your own business, or may fully retire midyear while drawing Social Security checks.

This page of the SSA Retirement Planner explains working while drawing Social Security benefits more thoroughly. It also includes examples, which can help you figure out how working while drawing a Social Security check might look for you.

One important piece of information to glean from the Social Security Administration’s examples listed on the above-linked page is that your benefit will most likely still be smaller than if you’d waited to get benefits at full retirement age.

If you work and draw benefits before retirement age, the deductions taken from your Social Security check because of earning more than the maximum amount will be added back, making for a larger monthly check in the long run. But that larger, adjusted check will most likely be smaller than the check you would have received had you waited until full retirement age to draw on your Social Security benefits.

What If You Retire Before Receiving Benefits?

Some people stop working before they receive Social Security benefits. In this case, individuals may live off a spouse’s income or other investments while waiting to reach full retirement age – or age 70, if they want to boost that benefits check.

If you retire before you decide to draw Social Security, it won’t have much effect. As long as you have 35 working years under your belt in which you earned a decent income, those zero-income years before you draw Social Security won’t make a difference because they won’t even count in your overall calculation.

Social Security for Spouses

If you and your spouse both worked, you’ll be eligible for separate Social Security benefits, based on your separate income amounts. But spouses who never worked, or didn’t work long enough to earn 40 credits in the Social Security system, can apply for benefits through a spouse.

The two main things to know about spousal benefits are that Social Security will come from the spouse’s benefits first and spousal benefits can be equal to up to 50 percent of the other spouse’s full retirement amount.

Beyond that, spousal benefits can be quite confusing, though, so let’s break it down.

If you’re at least 62 and your working spouse has already started collecting benefits, you can draw on your spouse’s Social Security benefits. If you don’t qualify for Social Security on your own, you can draw 50 percent of your spouse’s full retirement amount, reduced by a certain percentage based on your current age.

If you’re at least 62 and qualify for your Social Security benefits but would get more if you drew on your spouse’s, you’ll get a combination of benefits that will equal the larger amount.

So if your Social Security benefit is $500 a month, but 50 percent of your spouse’s benefit is $700 a month, you’ll get $700 a month, first from your benefits, then from your spouse’s.

Once you reach full retirement age (66.5 years old in 2021), you can draw the full 50 percent of your spouse’s full retirement amount. Note that waiting longer than full retirement age does not affect that amount, as delayed retirement credits don’t affect the spousal Social Security amount.

Other rules apply, as well. For instance, if your spouse works while drawing on your benefits, that benefit may be reduced, much like your own Social Security benefit would be reduced, as discussed above.

Also, younger spouses who are caring for disabled children who receive a parent’s Social Security benefits can also receive benefits, up to a family maximum amount of 150-180 percent of the base benefit amount.

That spouse can continue to receive benefits until the child reaches age 16, at which point the child’s benefits continue but the spouse’s benefits end unless he or she is old enough to receive age-based benefits.

Spousal Benefits Work Together

Spousal Social Security benefits get very complicated because a decision on the part of one spouse affects the benefits for the other spouse.

The simplest situation is when both spouses worked and neither will have substantially higher Social Security benefits. In this case, each spouse just draws on his or her own benefits.

But if there’s a big difference, or if one spouse doesn’t qualify for Social Security, you’ll want to take some time to make the best decision for your family.

Let’s say you were a stay-at-home mom for most of your working years, never earning enough money to qualify for Social Security. You can draw on your spousal benefit starting at age 62, but you’ll only get 35 percent of your spouse’s benefit (assuming a full retirement age of 66). And filing early will reduce your Social Security Income forever.

If your full retirement age is 66 and you were to wait another three years, for example (until age 65) to file early, you’d get close to 46% of your spouse’s Social Security Income.

Obviously, you’re in the best situation if you can wait until you’ve reached full retirement age.

Also, if your spouse takes their benefits before he or she reaches full retirement age, your benefits will be calculated on the actual monthly check they get, not their base benefit if they had waited until full retirement age. So your spouse drawing benefits early affects your benefit amount negatively.

In Case of Death or Divorce

Things get more complex if you’re divorced or the surviving spouse in death. In case of divorce, as long as you were married at least 10 years, you can collect Social Security benefits based on your ex-spouse’s Social Security record. Here are the rules:

  • You must have been married at least 10 years.
  • You must be at least 62, and benefit reduction rules apply the same as if you were still married to your ex-spouse. If your ex-spouse dies, you can collect benefits as a surviving divorced spouse at age 60. If you’re disabled, that limit goes down to age 50.
  • Your ex-husband must be eligible for benefits, though he doesn’t need to be using them. You need to have been divorced for two years or more to draw on your ex-spouse’s benefits if he or she is not using them.
  • You must not be currently married.
  • If you’ve been married and divorced twice, you can decide to claim benefits from either your first spouse or your second, as long as each marriage lasted at least 10 years.
  • You can draw benefits from an ex-spouse even if that person’s current husband or wife is also collecting spousal Social Security benefits.

If your spouse dies, things are slightly less complicated. You can start collecting survivor’s benefits–your deceased spouse’s full Social Security amount–as early as age 60. However, these other rules apply:

  • If you remarry before age 60 (or 50 if you’re disabled), you can’t receive survivor’s benefits unless your marriage ends through death, divorce or annulment.
  • If you remarry after 60, you’ll continue to receive benefits from your deceased spouse’s Social Security record.
  • If you’re caring for your deceased spouse’s child or children (whether they are yours biologically), you’ll receive benefits until they reach age 16. (This is regardless of your marital status or age.) Once the children are 16, they may continue to receive benefits, but yours will terminate.
  • You can only receive benefits from one spouse’s record. So if you would get better benefits through your second spouse’s work record than from your deceased spouse’s record, take those benefits instead.

So When Should I Take My Benefits?

Now that you have all of this information, let’s tackle the biggest question for most future retirees: When should I take my benefits?

This is quite a complex question and you’ll need to factor in a number of assumptions and calculations. One blog post can’t possibly cover all contingencies for this question. So we’re not going to definitively tell you when you should draw your Social Security benefits.

What we will do is look at a variety of factors you can consider in your decision-making process, and then we’ll link to some helpful resources that could help you make this decision.

First, as you’ve seen, Social Security benefits can vary a lot depending on when you start drawing benefits. And as I noted earlier, this difference in benefits is not meant to discourage you from retiring earlier.

The difference in benefit amounts is meant to even out over time. Theoretically, the “average American” would get the same amount of Social Security money, over a lifetime, whether he or she started drawing benefits at 62 or waited until 70. You’re just making up for lost time with larger monthly payments if you wait to take your benefits later.

It’s not hard to figure out how much you’ll get in each monthly check, depending on when you decide to draw Social Security benefits. But that doesn’t make it any easier to decide when taking benefits will be best for you.

How Much Do You Have Saved?

Your retirement savings should bear on when you decide to take your check. Many financial experts, including those at Charles Schwab, recommend putting off taking Social Security if you can live off your retirement savings during those early retirement years.

But you also don’t want to run out of money, so that you’re living only on meager Social Security checks later in life.

Whether you have a lot or a little in your retirement savings, you’ll need to make some delicate calculations, calculations that you might want to run through with a qualified financial planner. It’s really impossible to say off the bat whether you should use Social Security first or tap into retirement savings right away.

How Long Will You Live?

We don’t like thinking about death and life expectancy, but these things are important in Social Security calculations.

Remember, Social Security payments are based on average life expectancy, which is about 77 years. So whether you take early payments or delayed payments, if you live until age 77, you’ll get about the same amount of money.

But if you live much past 77, you’ll get a lot more money over time by delaying your payments and holding out for the bigger monthly check. On the other hand, if you die well before 77, taking smaller payments earlier will net you a larger payout in the long run.

If you have health conditions or a family history hinting that you may not make it to 77, you may want to consider taking your Social Security early. But if you expect to live to the ripe old age of 90 or older, delaying your check will likely be the best bet.

The chart below shows your break-even age, the age after which you’ll come out ahead if you live on. The longer you wait to draw on Social Security, the more quickly you’ll hit your break-even age:

What If Youre Married?

If you’re married, you’ll want to think through how you can maximize your total Social Security income as a couple. You have a few options here:

  • Claim and suspend. If one spouse has made a lot more than the other, and the higher-earning spouse wants to keep working, that spouse can claim benefits at full retirement age, while suspending payments indefinitely. The lower-earning spouse can then take the 50 percent spousal benefit. This means the couple gets a steady Social Security check, but the higher-earning spouses suspended payments will increase that spouse’s Social Security benefit over time.
  • Claim twice. If the two spouses have made a similar amount over their lifetimes, they can take lower payments to start while boosting Social Security payout later on. In this case, both spouses retire, taking the regular Social Security benefit for one and the smaller spousal benefit for the other. Later on, the second spouse can withdraw off of his or her own Social Security benefits. In this way, the couple gets 50 percent more than just one spouse’s benefit early in retirement, and a much higher second Social Security check later on.
  • Survivor benefit. It’s also important to think about what will happen to the surviving spouse if one of you dies. Waiting until full retirement age to collect Social Security boosts the surviving spouse’s monthly benefit, so this is typically a good idea.

If You Keep Working

In some cases, it’s best to delay taking benefits if you keep working in order to build up the bigger benefit. If you’re wavering about taking benefits early, at 62, while you still work, it’s usually best to delay at least until you reach full retirement age.

If the market works in your favor, you may get a better return on your investment by taking Social Security payments while you’re still working. Just invest the Social Security checks each month, and you may get a better payout in the long run.

The problem with this strategy is that it depends on the volatile market. If you don’t get a good payout, or if your investments lose money, you’ll be out that Social Security money, and you’ll live with the smaller benefit checks for the rest of your life. If you can’t afford to lose the money, this is probably not the best option for you.

But that doesn’t necessarily mean you shouldn’t take benefits while you work. Remember, if you make more than $17,640 (as of this year) while taking Social Security benefits, your benefits are reduced now, but will be boosted once you hit full retirement age or stop working.

As we noted above, the boosted benefit will likely still be smaller than your benefit would have been had you waited to draw Social Security until full retirement age.

Once you reach full retirement age, you can continue working for any amount of money, while still drawing your full, standard Social Security benefit. Still, you may want to continue putting off applying for your Social Security checks, as the monthly benefit will continue to grow with each month that you put off drawing Social Security, until the month you reach your 70th birthday.

The Future of Social Security

Right now, the future of the Social Security program is largely unknown. Because of today’s longer life expectancy, people are staying in the system longer than ever before, which is hurting its sustainability.

As of this year, the Social Security Board of Trustees estimates that “the combined trust funds will be depleted in 2035, one year later than projected in last year’s report.” This means that all cash reserves will be emptied by 2035, and Social Security will only pay out what it takes in that year from taxes.

Whether this is completely accurate or not is unknown, so the best we can do to understand the future of Social Security is to wait and see.


  • Abby Hayes

    Abby is a freelance journalist who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three. She has a B.A. in English Literature from Indiana University Purdue University Indianapolis, and lives with her husband and children in Indianapolis.