One of the most popular Social Security questions that I hear from baby boomers getting prepared for retire is "how are Social Security benefits calculated?" This is a vital question since it could affect how long you need to work, whether you need to continue to work during your retirement years, or any other factors of your retirement plan.

Firstly, please note that you receive a Social Security retirement benefit estimate each year in the mail, generally near your birth date. There're also several calculators available on the Social Security site to assist you estimate how much your retirement benefits will be, thus you do not need to know how to calculate the benefit yourself.

It is still useful to know how Social Security is calculated, but, so here are the basics:

Generally, your highest 35 years of earnings are listed for inflation, then averaged to figure out the basis for your monthly benefit. If you worked lower than 35 years, the missing years will be calculated as nothing for purposes of determining your benefit amount.

Planning suggestion: If you have near 35 years of earnings and you're near to retirement, you'll benefit greatly by continuing to work until you have 35 full years of earnings to include in your benefit calculation. Most of the people it'll affect are women who took time off work to raise a family.

The highest 35 years of earnings are then divided by 35 to get your average indexed monthly earnings (AIME). A formula is applied to your Average indexed monthly earnings to figure out your primary insurance amount (PIA). We won't go into the specifics of the formula; the crucial thing to notice is that your Primary insurance amount is the full unreduced benefit you'd receive if you retired at your full retirement age (at the age of 66 for people born between 1943-1954). This amount will be decreased if you take early retirement or increased if you retire after age 66.

The PIA is also the basis for many other benefits like spousal benefits, thus it's critical to understand that your Primary insurance amount isn't always the same amount that you will receive. If you are married and your spouse will be collecting benefits according to your earnings rather than her own, then you might want to maximize your own Primary insurance amount to maximize the total Social Security benefits you & your spouse will get.

Don't Forget About The Social Security Spousal Benefit
Can a spouse collect on her husband's social security if she reaches retirement age before her husband? No. In order for a wife to collect Social Security benefits on her husband's earnings the following requirements must be met:

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