If there was any doubt about this being an election year, turn on your favorite television show and sit through the election year commercials. They make my daily Jeopardy escape a chore. The person who invented the mute button should have received a Nobel Peace Prize.
From what I can tell (w/o the volume) political commercials haven’t changed much. This cycle, again, I see that Social Security (SS) is a hot-button political issue in 2024. And why not? In the program’s history, more people are getting SS payments or getting ready to take their SS than ever before.
As of March 2024, there are over 67.5 million beneficiaries on Social Security, and they collect over $119,837,000,000 per month[i]. Almost $120 billion per month! Or $1.440 Trillion per year. More than Mexico’s entire annual GDP, which, incidentally, is the 14th highest in the world at $1.414 trillion.[ii] That’s a lot of money and a lot of votes.
The average monthly amount paid to each of those 67.5 million beneficiaries is $1,774. And this brings me to the crux of this month’s newsletter, perhaps the most frequently asked question in my business, “Exactly how is my monthly SS benefit calculated.” Like all bureaucratic things, it’s complicated, but it all starts with the AIME. A for Average, I for Indexed, M for Monthly, and E for Earnings.
AVERAGE
Take the highest 35 years of reported SS earnings–up to the maximum amount taxable by SS. In 2024, the maximum amount is $168,600. In 1978, it was $17,700. (By the way, back then, it spent almost the same as today’s $168,600.)
INDEXED
The 35 years’ highest incomes are indexed to inflation to the year you turn 60 YOA. Think back to that $5,000 you earned working the drive-thru at the Jack in the Box in 1979 when you were 19. That $5,000 in 1979 dollars is inflated to year 2020 dollars.
MONTHLY
The 35 years of annual earnings are divided by 420 (35/12) to get the monthly average.
EARNINGS
Remember, only the wages in which you paid 6.2% and your employer paid 6.2% into Social Security count as SS earnings. If you didn’t pay into SS, that year of earnings wouldn’t count.
After those numbers are known—and in reality, only the SSA knows them—you run them through a mathematical equation to get your full retirement amount (FRA). The FRA is the amount you would receive when you reach your full retirement age. If you’re born in 1960 or later, FRA is 67.[iii]
Now, here is the fun part—Math!
For example, let’s say your AIME is $7,500 per month. $7,500 goes through these four steps:
- Multiply the first $1,174 by 90% = $1,056.60
- Multiply $1,174 to $7,078 by 32% = $1,899.28
- Anything over $7,078, multiply by 15% = $ 63.30, for a total of $3,019.18
- Round down to the next dime. The estimated FRA for this person would be $3,019.10.
Steps 1 to 3 are called bend points. The bend points are designed to give the highest amount, by percentage, to lower-income earners.
Another FAQ in my business is, “What can I do now, to get the most out of SS?” First, make sure you have 35 years of SS earnings. Any and all zero(s) ruin an average. If you’re a business owner, realize that lowering your income for income tax purposes also hurts your 35-year average. Be sure to save for retirement somewhere else.
Lastly, wait as long as possible to take SS. Remember, the number above is at FRA—each year you take it early, they cut the amount by 8%. At age 62, the monthly check is about 32% lower. Conversely, each year after FRA (up to age 70), they raise the amount by 8%. Start it on your 70th birthday, and you get about 24% more monthly.
To my State Trooper clients—as you know, you did not pay into SS during your police career—instead, you paid 8% into the State of Maryland Pension System. As a result, we fall into the Windfall Elimination Provision, or WEP. In the example above, in step 1—instead of 90%, use a multiplying factor of 40% to account for the WEP. $1,174 is multiplied by .40 for $469.60, or a monthly WEP reduction of $587. In the given example, your total would not be $3,019.10 but $2,432.10. See the PDF here https://www.ssa.gov/pubs/EN-05-10045.pdf for the SSA pamphlet explaining why and some ways to reduce the WEP impact.
The monthly SS check alone will not pay for much in your golden years. But recognize it for what it is: a souce of fixed income–one that is annually adjusted for inflation, distributed monthly, and guaranteed by the US Government. And while it costs us (and our employers) a lot of money to pay for this stream—it does manage to help a lot of people. For many less fortunate fellow citizens, it is their only retirement income. And since we live in a society that tries to show empathy toward our elders, it’s nothing to scoff at or rail against.
For yourself, take care of yourself. Make your SS check a supplement (or bonus) to what you’ve done to prepare for that time in your life when you cannot, or no longer wish, to work for income.
Thanks for reading. MK
[i] https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/
[ii] https://www.worldometers.info/gdp/gdp-by-country/
[iii] https://www.ssa.gov/oact/progdata/nra.html
Martin Knight, MBA CFP®
Chesapeake Investment Advisors, Inc.
106 Spring Ave.
Chestertown MD 21620
800-994-0221 or 410-810-0735
Fax 410-810-3422
Cell Number 410-490-9415
