How Much Will I Get from Social Security? (Bend Points Explained)

Hey guys, what's up? I'm Erin, and welcome back to the channel. Do you ever wonder how much you'll actually see from Social Security each month? Well, it isn't just about how much you earn. There's a formula, and it's how this formula treats those earnings. I want to break down the Social Security formula, because understanding how the formula works can help you maximize your benefits and avoid leaving money on the table. Because did you know doubling your earnings doesn't double your Social Security benefit? So let's pull back the curtain and see what's going on. We're going to talk about two key terms, AIME and PIA, which control how your benefit is calculated. And don't worry if you haven't heard of these terms before. We'll break it down with examples so you completely understand how they would affect your monthly check. Primary insurance amount. An individual's primary insurance amount, or PIA, is the monthly benefit a person is entitled to receive if they begin claiming Social Security retirement benefits at their full retirement age. For those born in 1960 or later, full retirement age comes at the age of 67. But keep in mind that you are able to claim Social Security benefits anywhere from the age of 62, which is considered claiming early, all the way up to the age of 70, which is considered delayed claiming. A worker's PIA, or primary insurance amount, is calculated based on their average indexed monthly earnings, their AIME, using a formula with specific percentages and thresholds known as bend points. So first things first, let's talk about average indexed monthly earnings. The Social Security Administration will take your highest 35 years of earnings and adjust them for inflation and then average them out for a monthly basis. So let's run two examples. Let's say we have a worker who earns $50,000 a year every year for his 35-year working career. But let's say we have another worker who earns $100,000 a year every year of his 35-year working career. So starting with the individual earning $50,000 a year, we calculate their entire lifetime earnings. This is simple and straightforward. Since we're saying that they earn $50,000 a year for their entire 35 years, they will have a lifetime earnings of $1,750,000. Then to determine their average indexed monthly earnings, we take 35 years, multiply by 12 months in a year, and we get 420 months. Then we take their lifetime earnings, divide that by 420, which gives us their average indexed monthly earnings or AIME. In this case, $4,166.67. Now I am fully aware that we could have simply taken $50,000 and divided by 12 to get this same exact figure. But keep in mind that this example is simplified for YouTube. Most of us are not earning the exact same amount every single year for 35 years straight. So the Social Security Administration does use total lifetime earnings, and it is done over a 35-year period or 420 months. Running the exact same calculation with a worker who earned $100,000 every single year, their AIME is $8,333. So that's the first step, figuring out your average indexed monthly earnings. But that's not the amount you get from Social Security. Social Security then comes along and applies their formula to figure out your future benefits. And it's at this point that you start to hear a lot of discussion about bend points, which is rightfully so, because bend points are really at the heart of how your future benefits are calculated. And before we do any sort of example, let's take a moment and talk about these bend points. The bend points essentially give a different level of emphasis to different levels of earnings. As of 2024, the first bend point is $1,174, and the second bend point is $7,078. Average indexed monthly earnings before the first bend point receive a 90% conversion rate. Earnings between the first bend point and the second bend point receive a 32% conversion rate. And earnings beyond the second bend point receive a 15% conversion rate. Social Security is progressive in nature, with lower income workers receiving a proportionately higher replacement rate than higher income workers. And we see this in the conversion rate. We see a higher conversion rate on lower earnings and a lower conversion rate on higher earnings. The intent here is to offer somewhat of a basic floor for retirees, which is beneficial for those who have overall lower lifetime earnings. So once we apply the bend points to a worker's average indexed monthly earnings, their AIME, we are essentially calculating their primary insurance amount, their PIA, or the amount they would receive from Social Security at full retirement age. So let's take our previous two examples. First, the worker earning $50,000 a year, and then the worker earning $100,000 a year, and apply the bend points to their AIME to calculate what their monthly benefit amount would be. For the worker with the AIME of $4,166, here's how this calculation would look. 90% to the first $1,174 of earnings, and 32% of the remaining AIME, giving us a total PIA of $2,014.25. Meaning if this worker claimed at full retirement age, this would be their monthly benefit. If they claimed early at 62, their benefit would be 70% of this, or $1,409.98. Or if they delayed claiming until the age of 70, their monthly benefit would be 24% larger than at full retirement age, or $2,497.67. When we calculate the PIA for the worker with the AIME of $8,333, the calculation looks very similar. 90% to the first $1,174 of earnings, 32% to earnings between $1,174 and $7,078, and 15% to earnings beyond $7,078, giving us a total PIA of $3,134.18, which again would be their monthly benefit amount for a worker claiming at full retirement age. Again, if they claimed earlier, their benefit would be lessened accordingly, and if they delayed claiming, it would be increased. So I feel like these examples demonstrate the progressive nature of Social Security quite well. We have a worker who has double the annual earnings and double the lifetime earnings, but they don't receive double the Social Security benefit. Yes, their Social Security benefit is higher, but not doubly as high. And that's because their higher earnings are not given the same weight as their initial earnings. And it is worth keeping in mind that Social Security does have a max benefit. There is a maximum income that is subject to Social Security tax, and as of 2024, that is $168,600. Beyond that point, you're not paying Social Security tax on your income. And accordingly, there is a maximum payout amount of Social Security, currently $3,822 per month at full retirement age. And all of these numbers are indexed for inflation. The annual earnings subject to Social Security tax, the monthly benefit payout from Social Security, and the bend points themselves, all of these figures are subject to inflationary adjustments, and they tend to increase a bit each year. You might also notice something else about this calculation, and that most of it comes down to your average index monthly earnings. Your lifetime earnings averaged out on a monthly basis. For most of us, we tend to have a very lengthy career, and Social Security itself looks at your average earnings over your highest 35 years. And I did recently do a video going over what happens if you retired a little bit earlier, and maybe you had some zeros in this calculation and how that might affect your benefit. So if you're interested in checking that one out, I'll link it down below. For most of us, most of us are earning typical incomes, and it does take an entire lifetime of earnings in order to hopefully maximize our Social Security benefits. Now to fully get the maximum Social Security benefit at any age between 62 and 70, you would have to have an income that was up to the max Social Security tax in any given year for 35 years of earnings. If you're looking at your earnings history on ssa.gov, keep in mind that any earnings prior to the age of 60 are indexed for inflation. And if you haven't yet done so, I strongly encourage that everyone set up an account with ssa.gov to look over their earnings record. But it is worth keeping in mind that as your income increases, it is a point of diminishing returns as far as Social Security is concerned. Of course, I want you to earn whatever income you are striving for, and increasing your income is always a good idea. But there is a point where it's diminishing returns as far as Social Security is concerned because higher earnings have a lesser conversion rate. So you can still get a great Social Security payout or a payout close to the max so long as you have a career that allows you to post many years of strong earnings. It's also worth keeping in mind that earnings beyond the Social Security tax limit are not factored in when calculating your AIME. So even if you went on to earn something like $500,000 a year, Social Security would still only look at the first $168,600 worth of earnings when calculating your AIME and ultimately your PIA. Social Security is essentially blind to any earnings beyond that point. Had you ever given consideration before to how your Social Security benefits were calculated? If you didn't, don't worry, they will still calculate it all the same for you. But in case you hadn't, this is how it works. Let me know your thoughts in the comments down below. I post new videos every single week. If you got anything at all out of this one, please give it a like. If you're new here, please consider subscribing. Or if you know of someone who might get something out of this type of content, please consider sharing. I'll see you soon. Bye. Which affect how your monthly benefit is calculated, which control, so close. Okay, break it down with examples. So you totally, I don't know. So you understand exactly how they affect your benefit calculation. Oh, I hated the end of that. That was awful. 67, but keep in mind that you are eligible, eligible, eligible. I guess the G is not important. We'll take your highest 35 years of earnings, adjust them for inflation. It's a slow adjustment process.