You’ve been paying into Social Security since your first job. Ever wonder who FICA was and why he’s always taking money from your paycheck? The Federal Insurance Contributions Act tax (7.65% of your wages) is a payroll tax that funds Social Security (6.2%) and Medicare (1.45%). Higher earners and the self-employed pay slightly more.
Okay, so it’s taken out of every paycheck you’ve ever had…. how much of it do I get in retirement? Let’s break it down.
How Social Security Benefits Are Calculated
Your benefit is based on your highest 35 years of inflation-adjusted earnings. Here’s how the Social Security Administration (SSA) calculates it:
Step 1: Index Your Earnings: Your past earnings are adjusted for inflation to reflect their value in today’s dollars.
Step 2: Calculate Your AIME: The SSA averages your top 35 years of indexed earnings to compute your AIME (Average Indexed Monthly Earnings).
Step 3: Apply the Benefit Formula: Your AIME is plugged into a progressive formula using "bend points" - income thresholds where the percentage applied to your earnings changes. In 2025, here’s how it works:
- 90% of the first $1,174
- 32% of the next $5,926
- 15% of anything above that
This formula gives you your Primary Insurance Amount (PIA) - your monthly benefit at Full Retirement Age (FRA).
Example: Let’s say your AIME is $6,500
- 90% of first $1,174 = $1,056.60
- 32% of next $4,752 ($6,500 - $1,174) = $1,520.64
- 15% of remaining $574 ($6,500 - $5,926) = $86.10
Total PIA = $2,663.34/month at your Full Retirement Age.
Now that we know what the FRA benefit is, we can understand the impact of applying for the benefits at different eligible ages.
Taking Benefits Before or After Full Retirement Age
Taking Social Security Early (as early as age 62):
- Your benefit is reduced permanently, up to 30% less if taken at 62.
- But you get income sooner, and for more years.
Delaying Social Security Past FRA (up to age 70):
- Your benefit increases by 8% per year due to delayed retirement credits.
- That’s a guaranteed return and can make a big difference if you live a long life.
Reasons to Consider Claiming Early
- Health concerns or shorter life expectancy
- Immediate income needs
- Avoiding investment drawdown in early retirement
- Enabling a spouse to claim spousal benefits sooner
- Belief in higher total lifetime benefit from starting early
Reasons to Consider Delaying Benefits
- Maximize monthly income (8% per year growth)
- Family history of longevity
- Larger survivor benefit for your spouse
- You’re still working or don’t need the income yet
- Tax strategy
Final Thoughts
Utilize SSA.gov for your benefits estimates. They do the calculations for you!
Social Security is more than a paycheck – it’s a strategy. When to claim should be part of a coordinated income, tax, and estate plan. A thoughtful decision here could mean thousands more in lifetime benefits, lower lifetime taxes, and better protection for your spouse.
Work with a fiduciary financial advisor who understands how to integrate Social Security into your retirement plan.
