How Your Social Security Benefit Is Calculated -- and Where Most Retirees Go Wrong
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By Stefon Walters – Apr 3, 2026 at 10:00PM ESTKey PointsSocial Security calculates your benefit using the 35 years during which you earned the most money.The full retirement age for people born in 1960 or later is 67.Your earnings record will provide a projected benefit at various claiming ages.Social Security is one of the country's most important social programs. According to research from The Motley Fool, 58% of Social Security recipients rely "heavily" or "exclusively" on their benefits for retirement income. And for many of them, Social Security is their only retirement income. Given how important Social Security is to many people's financial lives in retirement, it helps to understand the basics of how your benefit is calculated. Knowing this can help you maximize your potential and help you make more informed claiming decisions. Image source: Getty Images.
How Social Security calculates your monthly benefit The first step is to take the 35 years with your highest earnings and index them to convert them into today's dollars. The $50,000 someone might've earned 30 years ago isn't worth the same amount today, so indexing helps account for inflation and wage increases. Once the SSA has your indexed earnings, it divides them by the total number of months in those 35 years to calculate your average indexed monthly earnings (AIME). If you have less than 35 years' worth of earnings, the SSA will put a zero in for the missing years. After your AIME is set, the SSA applies a formula with bend points (its progressive benefits formula) that will produce your primary insurance amount. This is the monthly benefit you're eligible for if you claim Social Security at your full retirement age. How your claiming age affects your monthly benefit Although your full retirement age is when you're eligible for your primary insurance, you can claim benefits before or after then. Claiming benefits early reduces your monthly benefit by 5/9 of 1% monthly, up to 36 months. Every additional month after that further reduces them by 5/12 of 1%. This means that if your full retirement age is 67 (anyone born in 1960 or later), your benefits will be reduced by the following, based on claiming age: Age 66: 6.67% Age 65: 13.33% Age 64: 20% Age 63: 25% Age 62: 30% Delaying benefits past your full retirement age will increase the benefit by 2/3 of 1% monthly (8% annually) until you turn 70. Once you turn 70, benefits are no longer increased by delaying your claim, so that's the latest claiming age that realistically makes sense for someone. Where most retirees go wrong One of the more underrated tools the SSA provides is the record of earnings, which gives a snapshot of your reported earnings through the years. It also shows what your current benefit would be at different claiming ages, so you can begin thinking about what claiming age makes the most sense for you. To access your record of earnings, you'll need to log in to your Social Security account via the SSA's website. If you don't already have an account, creating one is straightforward. Knowing what to expect from your benefits in advance can help you plan your retirement income proactively.Read NextApr 3, 2026 •By Reuben Gregg BrewerHere's How Claiming Social Security at 62 Affects Your Monthly Income for LifeApr 3, 2026 •By Kailey Hagen, CFPThis Overlooked Rule Could Make Some of Your Roth IRA Savings TaxableApr 3, 2026 •By Maurie BackmanThe Roth IRA Conversion Trap You Don't Want to Fall IntoApr 3, 2026 •By Kailey Hagen, CFPNo 401(k)?
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