Once you reach retirement age, you're eligible to receive Social Security retirement benefits. More than 65 million Americans are collecting Social Security benefits, which are meant to replace a percentage of your pre-retirement income and help you live more comfortably after you stop working.

Social Security benefits are calculated based on past earnings, the age the beneficiary claims benefits, and a few other factors set forth by the Social Security Administration (SSA).

Anyone born in the year 1929 or later needs at least 10 years of work – or 40 credits – to be eligible for retirement benefits. However, benefits are typically calculated using a formula that summarizes up to 35 years of your indexed earnings, so it's important to have as few zero-earning years as possible to maximize your benefits.

Understanding how Social Security retirement benefits are calculated, whether you owe taxes on them, and other important information can help you with retirement planning both mentally and financially. Read on to learn more.

How Social Security retirement benefits are calculated

As long as you're working, you can keep earning Social Security benefits for every dollar you pay into the retirement system. But calculating the benefits you'll receive can be a bit confusing.

First, you must calculate your average indexed monthly earnings (AIME). Then, you use that number to find the primary insurance amount (PIA). Adjustments can be made based on the age you begin receiving benefits, and then your final benefits are calculated. However, other factors such as the windfall elimination provisions, and retirement earnings test can change how much you'll receive.

Average indexed monthly earnings

The average indexed monthly earnings summarize your lifetime Social Security-covered earnings. To calculate it, start with your taxed Social Security earnings each year, which is shown on your Social Security statement.

Then, multiple each year's earnings based on that year's National Average Wage Index (NAWI). The purpose of this is to adjust for inflation and account for the general rise in the standard of living that happened during your working lifetime. Use the table that published the year you turn 60. While any wages you earn after age 60 can increase your benefits, they are not adjusted.

The average of all indexed earnings from the 35 highest-earning income years is factored into the AIME calculation. That's why it's important to have as few zero-earning years as possible.

So, to do this, add up the highest paid 35 years, and divide by 35 to get the income each year. Or, divide by 420 to get monthly amounts. For example, if the highest 35 years of earnings totals $4,242,000, the AIME is $10,100.

Primary insurance amount

Once you have the AIME, it's converted to a primary insurance amount (PIA). The calculation accounts for "bend points," which exist because Social Security replaces a greater average monthly payment for those who are low-income than for high-income workers. The bend points help skew the benefits relative to the AIME.

Bend points are adjusted each year for inflation, but to calculate, use the bend point published in the year you first become eligible for benefits (typically age 62). The Social Security Administration's established percentages – 90%, 32%, and 15% – are then applied.

For example, say a beneficiary becomes eligible for Social Security benefits in 2022. The two bend points are $1,024 and $6,172. Using the AIME of $10,100 from previously, calculate the PIA by:

• Multiplying the first $1,024 of the AIME by 90% (.90x$1,024 = $921.60)
• Subtracting $1,024 and $6,172 and multiplying that by 32% ($6,172-$1,024 = $5,148) ($5,148x0.32 = $1,647.35)
• Subtracting $6,172 from the total AIME and multiplying the difference by 15% ($10,100-$6,172 = $3,928) ($3,928x0.15 = $589.20)

The PIA is the sum of these results: $921.60 + $1,647.35 + $598.20 = $3,158.15

Retirement age and the impact on benefits

A person can start receiving retirement benefits as early as age 62 but can choose to delay receiving benefits until age 70. Full retirement age (FRA) depends on the year you were born.

• If you start getting benefits early, they are reduced for every month between when you start receiving them until FRA (which is age 65-67 depending on the year you were born). The reduction is 5/9 of 1% for each month, up to 36 months. If the number of months is more than 36, the benefit is further reduced 5/12 of 1% per month.
• If you delay getting benefits, this can increase how much you receive, and the increase is applied for every month between FRA and when you start receiving benefits. You can earn an additional 3-8% depending on your birth year.

If you start benefits prior to full retirement age but keep working, your benefits may be deducted if they exceed a certain threshold. However, benefits are recalculated when you reach FRA.

Windfall elimination provision

The windfall elimination provision can reduce benefits for those who receive a pension from an employer who was not subject to Social Security payroll taxes.

You may be affected by this provision if:

• You earn a retirement pension from an employer who didn't withhold Social Security taxes, AND
• You qualify for Social Security retirement benefits from work in other jobs where you did pay taxes

Or, it may apply if:

• You turn 62 after 1985, OR
• You develop a qualifying disability after 1985

This provision was enacted to remove the advantage some beneficiaries have because before 1983, those whose primary job wasn't covered by Social Security had the advantage of receiving a benefit representing a higher percentage of their earnings.

Retirement earnings test

Social Security benefits may be temporarily withheld under the retirement earnings test if:

• A beneficiary under the full retirement age continues to work, AND
• Earns above a certain amount

Technically an income tax, this can affect benefits and the beneficiary's net income. Essentially, it results in a temporary withholding of monthly benefits.

When are Social Security retirement benefits taxed?

If you have an income other than your Social Security benefits, you may be required to pay federal income taxes to the IRS on those benefits.

If you file a federal tax return as an "individual" and your combined income* is:

• Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits
• More than $34,000, you may have to pay income tax on up to 85% of your benefits

If you file a joint return, and both you and your spouse have a combined income* that is:

• Between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits
• More than $44,000, you may have to pay income tax on up to 85% of your benefits

If you are married and file a separate tax return, you'll also likely pay taxes on your benefits.

*Combined Income: Adjusted gross income (AGI) + nontaxable interest + 1/2 of your Social Security Benefits

There are also 13 states that tax Social Security benefits at the state level, including Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

Related Reading: Is Social Security Taxable?

Will your Social Security retirement benefit ever change?

Cost-of-living adjustments (COLA) are applied to benefits beginning the second year of eligibility, or when someone is 63, even if the worker hasn't yet started to receive benefits.

Typically, this adjustment is the same as the growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one calendar year to the third quarter of the next calendar year. Effective in December of the current year, it's payable in January of the next year.

While there are some years with a COLA of 0%, it can vary from year-to-year and will change the amount of retirement benefits a beneficiary receives.

Your benefits may also increase if you continue to work after starting to receive benefits. This is because you'll still be paying Social Security taxes on your wages. The SSA will check your record every year to see if your earnings will increase your monthly benefit, and if so, you'll receive a letter sharing the new benefit amount.

Social Security retirement benefits FAQ

What is the maximum Social Security retirement benefit you can get?

Your Social Security benefit depends on the age you are when you retire and start receiving benefits. For example, if you retire at age 62, your benefits will be reduced until you reach FRA. Or, if you wait until you're 70, your benefits will be greater.

In 2023, if you retire at:

• Age 62, the maximum benefit would be $2,364
• FRA, the maximum benefit would be $3,345
• Age 70, the maximum benefit would be $4,194

If I get a pension, are my Social Security benefits decreased?

If you have a retirement pension from an employer who does not pay Social Security taxes, your benefits are calculated differently. This is called the windfall elimination provision, and it does lower your Social Security benefit.

If I make withdrawals from my retirement account, does it affect my Social Security benefits?

No. Pension payments, annuities, and interest dividends from savings and investments are examples of factors that don't count as income, and they do not decrease your benefits.

How do I qualify for Social Security benefits?

You must earn a certain number of credits depending on the age you apply and type of benefit you apply for, but the maximum credits necessary is to have earned is 40. Your annual earnings are used to calculate credits, and you can earn up to four credits per year. The amount you need for one credit is $1,510 (in 2023).