Andy Landis
December 27, 2016
Avoid retirement surprises by understanding the Social Security computation. Let’s go back to school to study the math behind your Social Security. A little understanding of the numbers goes a long way to avoiding retirement surprises and shortfalls. Like other pension systems, your Social Security is based on three factors: eligibility, earnings, and age. SSA puts its own twist on each factor. Math 101: Compute your eligibility To be eligible for Social Security retirement payments, you need 40 Work Credits (WCs). You can earn up to 4 WCs per year, so they’re sometimes called quarters. In 2015 you earn one WC for each $1220 you earn anytime in the year. So if you earn 4 x $1220, or $4880 in 2015, you get all 4 WCs for the year. (Only work where you pay Social Security taxes counts. The cost per WC generally increases annually with inflation.) 40 WCs ÷ 4 WCs per year = 10 years of part-time work needed for a retirement payment. Math 102: Compute your average earnings The second factor is your lifetime average earnings. Many pensions are computed on your best 5 years of work. Not Social Security. It’s based on your best 35 years of work. Here’s how: • SSA records each year’s earnings subject to Social Security taxes. • When you hit 62, every year is multiplied by an inflation factor to make it more comparable to today’s pay level. • The top 35 years of inflated earnings are selected and averaged together. The years need not be contiguous (in a row or block). That 35-year average determines your Social Security payment—a higher average means higher Social Security. 35 years are used, even if you don’t have 35 years of work. Missing years post as zeros, reducing your 35-year average. A little math hocus-pocus (see converts your 35-year average into your Social Security payment. Avoid two mistakes here. • First, high late-career earnings don’t always mean high Social Security, if you had low earnings earlier. It’s a lifetime average. • Second, retiring a few years early after lifelong work won’t drastically reduce your Social Security. A few zeros have little impact on your 35-year average. Math 103: Compute your age The third factor is your age when you start payments. That’s based on your Full Retirement Age (FRA). Your FRA is between 65 and 67, determined by your birth year. (See Whatever your FRA, you can start payments any month from 62 to 70. Start payments at your FRA and you get a 100% payment. Start payments earlier and you get a small reduction for each reduction month. For example, if your FRA is 66, and payments start at 62, your 48 reduction months yield a 75% payment. Start payments after your FRA and you get a raise for each month’s Delayed Retirement Credit (DRC). For example, if your FRA is 66 and payments start at 70, the 48 DRCs yield a 132% payment. Age factors top out at 70; don’t delay filing after that. An SSA calculator at figures the percentage for any month from 62-70. More schooling • Get SSA’s estimate of your future payments at • Math nerds: See a sample computation dissected by SSA at or in my book, available at • Compute your own estimate at Type “your retirement” in the lower search box (under the “Publications” headline), and select your birth year in the “PDF” button. It all adds up. So as always, keep on planning.