Social Security has grown from its humble origin in the Great Depression to become a key source of income for millions of retirees today. But how are these benefits calculated on a per-person basis? There are several factors that come into play when it comes to calculating Social Security benefits. Here is a breakdown of those factors and how they are used to determine the monthly benefit of a given retiree. There are four key factors that determine the monthly benefit amount for a retiree. They include: These four factors are the variables that go into the Social Security benefit calculation. But to even be eligible to receive benefits, the worker must have been gainfully employed for at least 40 three-month quarters of time. And in each quarter, the employee must have earned at least a certain amount (that is indexed for inflation each year) in order for that quarter to count towards receiving benefits. And in all 40 of those quarters, the worker must have paid either the 6.2% Social Security tax if he or she was a W-2 employee or 12.4% if he or she was self-employed. The purpose of the calculation is to adjust your career earnings to reflect the changes in general wage levels that took place during the years of your career. The job that paid a worker a $300 monthly income 40 years ago, would yield quite a bit more today. Social Security says that the adjustments "ensure that a worker's future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime." Calculating Social Security benefits is a three-step process, broken down as follows: Calculating Social Security Benefits
Factors That Determine Social Security Benefits
How to Calculate Social Security Benefits
How Are Social Security Benefits Calculated FAQs
What is Social Security?
Social Security is a governmental program that provides retirement benefits, disability income, survivor’s benefits and supplemental security income for those who are eligible.
Who is eligible for social security?
As a worker to be eligible for benefits you must be at least age 62 (or be disabled or blind), and you must have enough work credits to qualify for benefits.
How is social security taxed?
Taxes on your social security benefits will be based upon your combined income for the year. Combined income is defined as: Adjusted gross income + non-taxable interest income + ½ of your Social Security benefits. Based on your combined income for the year, 50% or 85% of your Social Security benefit could be subject to taxation for the year.
What's the difference between Medicare and Social Security?
Medicare is a publicly-available health insurance program, whereas Social Security is a governmental program that provides retirement benefits, disability income, survivor’s benefits and supplemental security income for those who are eligible.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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