Social Security insurance benefits are based on a primary insurance amount, or PIA. The PIA is the amount of benefits a person would receive if he or she elects to begin receiving benefits at full retirement age (FRA).

PIA is calculated based on a person’s average indexed monthly earnings (AIME) during the 35 years in which they earned the most.

Social Security also indexes your wages for inflation. Your wages are indexed to the average wage for the year you turn 60. Because of this, there is no way to determine the exact amount of your benefits before you reach age 60.

You total up your highest 35 years’ wages and divide by 240 to arrive at your average indexed monthly earnings. If you have less than 35 years’ earnings, there will be one or more zeroes in the calculation, which will lower your AIME.

Once your AIME is determined, you are ready to calculate your PIA. To do this, there are three “bend points”, which are adjusted for inflation each year. The bend points from the year you turn 62 are used to determine your PIA. Thus, your PIA cannot be calculated exactly prior to attaining 62 years of age.

For the year 2018, here is how the PIA calculation is made:

You add up the following numbers:

1. 90% of the first $895 of your AIME, plus
2. 32% of your AIME for earnings from $896 through $5,397, plus
3. 15% of your AIME above $5,397.

The resulting number is then rounded down to the next lowest $.10 (if it is not already a multiple of $.10), and — presto — you have your PIA.

But if you retire prior to your full retirement age, your PIA will be reduced by 6.67% per year (or 0.56% per month) for 36 months prior to reaching full retirement age. If you retire more than 36 months before your full retirement age (the earliest you can retire is age 62), your PIA will be reduced by an additional 5% per year (or .42% per month).

See, e.g., Social Security Ruling (SSR) 62-2.

On the other hand, if you retire later than your full retirement age, your PIA will grow at 8% per annum until you reach age 70.

The maximum amount of social security benefits a person can receive in 2018 is $2,788 per month. This amount would be received if the person earned the maximum social security wage for at least 35 years.

If retirement is deferred until age 70, this amount would grow to $3,680 per month. Assuming a rate of return of 3% per annum, this would be the equivalent of $1,472,067. However, this would be comparing apples to oranges because you cannot pass on your social security to your heirs.

This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.