7 Things Everyone Needs to Understand About Social Security Before Retirement
Social Security provides retirement income for millions of Americans, but there's a lot more to the program than many people think. From the calculation of benefits to the application process, here are seven of the most important things you should know and understand about Social Security before you retire.
1. How benefits are calculated
The Social Security formula can be a little complicated, but here's the short version. The Social Security Administration looks at all of your lifetime earnings, up to each year's Social Security maximum, and adjusts them for inflation. Your 35 highest-earning years are then averaged together and are divided by 12 to produce your average indexed monthly earnings, or AIME.
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This figure is then applied to the benefits calculation formula -- which changes with inflation each year -- to produce your initial monthly benefit at full retirement age. This is also known as your primary insurance amount, or PIA.