You’ve worked hard all your life, and now it’s time to retire. But even if you plan to continue working, you may be able to start collecting Social Security to supplement that income.

Before you can make those decisions, though, you need to know how much money you can expect to collect. You can get that information through the Social Security Administration (SSA) website, but until it’s time for benefits to be issued, it serves as only an estimate. By making those calculations yourself, you’ll be better able to see how your decisions today affect your future benefits. Using the steps below, you’ll be able to create a Social Security calculator that will give you a more accurate picture of the monthly dollar amount you can expect to receive.

Determine whether you qualify for a retirement benefit

Social Security benefits are based on credits, and you start earning credits the first day you fill out a piece of employment paperwork. Your employer submits a portion of each paycheck to the federal government on your behalf, and part of this tax payment goes toward your future Social Security benefits, attached to your SSN.

But you don’t have to work for a business to earn credits toward retirement. If you work as an independent contractor or earn any other type of taxable income, you report that to the IRS. Contractors pay self-employment tax, which funds both their Social Security and Medicare.

To qualify for Social Security, you need at least 40 credits, which equals about 10 years of work. Those years don’t have to be consecutive. They accumulate throughout your life, counting toward benefits regardless of when they were earned.

You won’t be able to start collecting your Social Security payout until you’re at least 62 years of age, but that will be a reduced amount. You can collect 100% of your benefits at your full retirement age, which is determined by your birth year. If you wait until after your full retirement age to collect benefits, you can earn delayed retirement credits which boost your monthly income.

Adjust all of your annual earnings for inflation

Unless you’re retiring this year, your future payouts will need to factor in inflation in the years between now and retirement age. The Social Security Administration uses the national average wage indexing series to calculate benefits for retirees, adjusting earnings to account for inflation in the years prior to retirement.

Your Social Security retirement earnings will be adjusted to the average wage two years prior to retirement, attached to taxes taken out with your SSN throughout your lifetime. In 2021, that average wage was $60,575.07, so someone retiring in 2023 will be indexed based on that. The IRS will take $60,575.07 and multiply it by the wage ratio for each year prior to that to come up with a wage for every year worked. The Social Security Administration maintains this wage ratio, which is based on the National Average Wage Indexing Series, available here. You can perform this calculation yourself or go to the Social Security website and input the year you plan to retire at the bottom. That will give you the estimated indexing factors for each year going back to your year of birth.

Find the 35 highest inflation-adjusted years

If you worked more than 35 years, your benefits will be based on your highest 35 years of earnings. This amount will be indexed to adjust for inflation. If you didn’t work for a full 35 years, a 0 will be used for years you didn’t work, which will reduce your overall payout.

Using this Social Security retirement calculator, you can see how working a few more years can help boost your Social Security earnings. For those who worked 32 years, another three years of strong annual wages can make a big difference in your monthly payout once you retire. For many people, wages increase with age, which means your highest earning years will occur in your fifties and sixties.

Calculate your average indexed monthly earnings (AIME)

Once you have your inflation-adjusted 35 years, you’ll divide that amount by 420. That’s the number of months in a 35-year period, so it gives you a monthly inflation-adjusted amount. That amount will be rounded down to the nearest lower dollar amount. If you retired today, that would be the amount the SSA would use to determine your monthly Social Security benefit.

If you were taking retirement in 2023, SSA would take your inflation-adjusted, indexed wages for every year prior to 2021. Any wages you earned after 2021 wouldn’t be indexed. Assuming those two years were among your 35 highest-earning years, the amount would be added to your total before being divided by 420.

Determine your primary insurance amount (PIA)

To calculate your actual Social Security retirement amount, you’ll need to factor in something called “bend points.” These points are based on three separate percentages of your average indexed monthly earnings, set by law. For 2023, your PIA will be the total of:

• 90 percent of the first $1,024 of your earnings plus
• 32 percent of your average earnings between $1,024 and $6,172 plus
• 15 percent of your average earnings over $6,172

If the total above is not a multiplier of $.10, the SSA will round down the amount to the next-lowest multiplier of $.10. The SSA sets a maximum amount available to recipients each month, and this amount can vary from one year to the next. For 2023, someone filing at age 70 can receive up to $4,555 a month, while someone filing at full retirement age caps out at $3,506. If you begin filing at age 62 in 2023, you’ll only be able to receive up to $2,572.

Adjust for your claiming age

To get the full amount you calculated above, you’ll need to wait until your full retirement age. However, you can start claiming benefits earlier if you’re willing to take a reduced amount. We find for most people, though, the best option is to wait as long as you possibly can before taking full Social Security benefits. In fact, if you keep working after you reach full retirement and wait until closer to age 70 to retire, you could be eligible for delayed retirement credits, which will bring in an additional monthly income.

Remember that Social Security is inflation-proof, guaranteed income that will last for your entire life – for many, it’s crucial to get the largest monthly benefit possible.

If you take your benefits before your full retirement age, the SSA will reduce your monthly payout by a percentage. Depending on when you start claiming benefits, this is the percentage of your benefits that you’d receive:

• Age 62 (born after 1959): 70 percent
• Age 62 (born before 1960): 75 percent
• Age 65 (born after 1959): 86.7 percent
• Age 65 (born before 1960): 93.3 percent

Keep in mind that this reduced percentage will apply to the entire lifetime of your benefits. However, the amount you’ll get increases on a sliding scale between 62 and your official retirement age, so it’s important to look at the chart on the SSA page as part of your Social Security retirement estimator.

Bottom Line

Reaching retirement age means achieving a lifelong goal. It also means being rewarded for decades of hard work. But the last thing you want to do is take your benefits too early, and be stuck with a reduced payment for your entire retirement. A qualified financial advisor can help make sure that you’re taking Social Security benefits at the ideal time, based on your unique financial situation.

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