Laying Claim

Adam M. Grossman

IN MY WORK AS a financial planner, there’s one topic that always seems to raise an eyebrow: Social Security. When people see projections of future retirement benefits, they often respond with skepticism. My sense is that media reports, questioning the system’s solvency, have led people to discount the value of Social Security benefits—or disregard them entirely.

In my view, this is a mistake. While no one can guarantee what Social Security will look like in the future, it’s important to understand the basics of how the system works. This understanding may help you maximize your own benefits and avoid costly mistakes.

Social Security is complicated, with thousands of rules. But it isn’t hard to understand the calculations behind the standard monthly retirement check. There are just three main factors:

1. Primary Insurance Amount. Checks received by retirees will vary with the amount they paid into the system during their working years. The Primary Insurance Amount, or PIA, is the sum you would receive if you opted to start benefits at what is called Full Retirement Age, which used to be age 65.

There are three important things to know about your PIA. First, in most cases, you need to work for at least 40 quarters, equal to 10 years, to be eligible for benefits. Second, once you’ve accumulated those 40 quarters, Social Security will calculate your PIA based on your average earnings over your 35 highest-earning years. If you have fewer than 35 years of earnings, the government will average in zeroes for those years. Third, during your working years, Social Security only taxes your earnings up to a certain level. As a result, during retirement, your benefit will also be capped. This year, for example, the income threshold is $128,400. Whether you earn $128,400 or $500,000 or $1 million this year, the boost to your retirement check will be the same.

To provide a simple example of the calculation, suppose you’re nearing retirement and your career earnings—adjusting for inflation—have averaged $150,000. Here’s how Social Security would calculate your PIA:

  • 90% of your first $895 of average monthly earnings: $805.50
  • 32% of the next $4,501 of earnings: $1,440.32
  • 15% of the final $5,302 of earnings (that is, up to the cap): $795.30

Put it all together and your total monthly benefit at your Full Retirement Age would be $3,041, equal to $36,493 a year.

2. Full Retirement Age. Above, I mentioned the term Full Retirement Age, often abbreviated to FRA. This is the age at which you are entitled to receive a check equal to your PIA. FRAs vary based on when you were born. When Social Security began in the 1930s, everyone’s FRA was 65. To reflect rising life expectancies, Congress has increased the FRA to as late as age 67, so younger people will have to wait a little longer to receive full benefits. You can look up your own FRA on the Social Security website.

3. Age at which you claim benefits. At your FRA, you are entitled to a check in the amount of your PIA. You have the option, however, to start benefits as early as 62 or as late as 70. If you opt to start earlier, your check will be reduced substantially below your PIA. Alternatively, if you delay additional years beyond your FRA, your benefit will increase substantially—about 8% per year for each year you wait.

Continuing with the above example, if your FRA is 67 and you are able to wait until 70, your benefit would increase by 24% to $3,771 a month, equal to $45,252 a year. Of course, you would receive those checks for fewer years—something to consider if you have health concerns. But if you’re in solid health and opt to delay to age 70, you would reach breakeven around age 82—and be ever further ahead with every year you live thereafter. That’s why I encourage people to wait until 70.

Want to learn more? Head to, where you can set up an account and download an up-to-date copy of your Social Security statement, which will provide benefits estimates based on your earnings history.

Adam M. Grossman’s previous articles include Proceed with CautionOld Story and Slipping Away. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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