Formula that helps you calculate your retirement in the USA

Most retirement Americans receive money from the Social Security Administration (SSA), and many do not understand how it is calculated how much they will receive.

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However, knowledge of the formula for calculating pensions is very important, because it helps to estimate the level of income that you will have after retirement, and to adjust your retirement savings relative to this data, writes USA Today.

Index of average monthly income

The first step in the formula for calculating a pension is to determine the average monthly income or AIME.

To calculate your AIME, SSA takes your income data for each year throughout your working life, then income for each year is adjusted for inflation data (indexed).

The formula uses 35 years, when you had the highest earnings, it is these years that are used to determine AIME. The calculation is made by summing all indexed revenues for these 35 years, their sum is then divided into 35 to determine the average annual figure, and then divided into 12 to determine the average monthly income.

PIA calculation

Your average indexed monthly income is then used to determine the amount of your pension, officially this indicator is called the principal insurance amount or PIA (Primary Insurance Amount). This number, along with your age at the time you apply for a pension, determines the amount of your initial social security benefit.

The formula for determining PIA in 2018 is:

• 90% of the first $ 895 in your AIME;
• 32% of the AIME part in the range from $ 895 to $ 5 397;
• 15% of the AIME portion exceeding $ 5 397.

An important point: the accounted interest remains unchanged every year, but the threshold values ​​change. The amount of your pension will be calculated according to this formula, starting from threshold values ​​in the year when you first became eligible for pension social security. Under current law, an American gets this right when he turns 62 of the year.

In other words, if you turned 62 in 2015, you would use the thresholds of $826 and $4 in the formula instead of the 980 values ​​of $2018 and $895. These values ​​can always be found on the SSA website.

Here is an example of how this works. Suppose you turned 62 of the year in June of 2018 of the year, and your average monthly yield was 4500 dollars. Your PIA will be:

• 90% of the first $ 895 = $ 805,50
• 32% of remaining 4 105 dollars = 1 133,60 dollars

The combination of these two amounts gives you a PIA of $ 2111,10 per month. Please note that this is not the actual amount you will receive if you decide that the SSA should start paying you a pension from 62 years. For the final calculation of the amount that the pensioner receives in his hands, a few more indicators are used.

Adding COLA

So, your principal amount of pension is determined by your income during life and the thresholds in the social insurance calculation formula that was valid at the time you turned 62. When you wish to start receiving pension payments, this amount will be adjusted for changes in the cost of living (cost-of-living adjustments - COLA) that occurred in the years after your pension was calculated.

We use the previous PIA example in the amount of 2111,10 dollars in the 2018 year. Suppose you do not plan to receive a pension until you reach the full retirement age in 66 years and 4 months, which will happen in the 2022 year.

If COLA for the period from 2019 to 2022 is 2%, 3%, 2,5% and 0,8%, for example, then these indicators will be applied to your PIA, which will increase your monthly pension payments to 2300,24 dollars.

Early or late retirement

Another important issue is when it is most advantageous to start receiving pension payments: in 62, or it is still worth waiting until the full retirement age. Depending on the year of your birth, your full retirement age will come in a period of 66 or 67 years, or somewhere in the middle.

If you decide to start receiving a pension before reaching full retirement age, the amount of benefit calculated by the previous steps will be reduced by 0,56% monthly (6,67% per year) during 36 months until you reach full retirement age; and on 0,42% every month (5% per year) for 36 months until you reach 62 years.

If you wait until the full retirement age, your pension will increase by 0,67% (8% per year) every month, and the amount of your payments may continue to accumulate in this way until 70 is old.

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