Social Security retirement benefits are calculated using your highest 35 years of indexed earnings, not just your recent income.
The Social Security Administration (SSA) determines your monthly retirement benefit by first calculating your average indexed monthly earnings (AIME) over your highest 35 years of earnings. These earnings are adjusted for inflation to reflect their value over time. Then, a formula is applied to your AIME to arrive at your primary insurance amount (PIA), which is the benefit you would receive if you start claiming at your full retirement age. Finally, your benefit is adjusted based on the age you choose to begin receiving payments.
This information provides a general overview of how Social Security benefits are calculated and does not constitute financial advice.
What are the 'bend points' in the Social Security benefit calculation formula?
The 'bend points' are specific dollar amounts used in the Social Security benefit calculation formula that determine how your Average Indexed Monthly Earnings (AIME) translate into your Primary Insurance Amount (PIA). The formula is progressive, meaning it replaces a higher percentage of earnings for lower-income workers than for higher-income workers. The bend points are adjusted each year for inflation. For example, for 2023, the first bend point was $1,024 and the second was $6,172.