Social Security Retirement Benefits: The Basics
By B. Chase Chandler, CFP®
There are two primary factors to consider when planning for Social Security Retirement Benefits. Here is a quick overview:
#1: Your Benefit
Your Social Security Retirement Benefit will be based on your Average Indexed Monthly Earnings (“AIME”). The Social Security Administration (“SSA”) takes your highest 35 years of earnings (indexed for inflation) and divides the sum by 420 (i.e. 35 years x 12). This is the AIME. Then they apply the Personal Insurance Amount (PIA) formula, which determines your monthly retirement payment. The PIA formula can get a bit complex, but it is usually around 30-50% of AIME. The higher a retiree’s AIME the lower the percentage. And lower income earners will receive a higher PIA payment. (You can see an example at the ssa.gov website here.)
The second consideration is how benefits will be taxed. Combined Income, as defined by SSA, is your AGI + tax-free interest received + 1/2 of your PIA payment. If you’re married filing jointly and your combined income is above $32,000, half of your PIA payment could be taxable. If combined income is > $44.000 then 85% of your payment could be taxable. If single, half of your payment will be taxable if combined income is north of $25,000. If combined income is > $34,000 it will be 85% taxable. The amount of your SS payment that is taxable is also dependent on a few other factors found of page 7 of Pub. 915.
Your advisor should be able to calculate a current estimate of PIA and/or strategize with you about how to optimize benefits and tax efficiency.
B. Chase Chandler, CFP®