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How retirement benefits are figured
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I'm getting a little embarrassed apologizing for messing up with my email responses to readers. I pride myself that I am still able to personally respond to every email I get. But I am a computer Neanderthal. I can just barely handle the software programs I need to know to write this column and submit it to my syndicator; and to respond to emails from my readers. Recently, I was in the middle of answering an email from a guy who wanted to know how Social Security retirement benefits were figured, when all of a sudden, my fast-moving typing fingers must have accidentally hit an odd combination of keys and POOF, my entire answer was translated into Japanese! Actually, I'm not sure if it was Japanese, but it looked like what I imagine Japanese writing to look.

Anyway, in my attempts to remedy that error, I must have hit another odd combination of keys when POOF again, the entire document disappeared! And I was never able to retrieve it.

So if there is some reader out there who had questions about Social Security computations and is wondering why I never responded to his email, please send it again. I'll type my response more slowly and carefully and hope I am able to keep it in English and hit the "send" key before I delete it again!

In the meantime, I thought it might be a good time to explain once again (I do this every couple years or so) how Social Security retirement benefits are figured. The formula is simple in a general sense, but very complicated when you get to the nitty gritty details.

Here is the simple part. A Social Security retirement benefit is a percentage of your average monthly income, using your highest 35 years of inflation-adjusted earnings. Note that there are four parts to that formula: 1) a percentage; 2) your average monthly income; 3) an inflation-indexing factor; and 4) a 35-year base. We'll work backwards to explain how things work.

The 35-year base is the easy part. When you file for retirement benefits, the Social Security Administration will look at your entire earnings history and pull out your highest 35 years. They don't have to be consecutive. If you don't have 35 years of earnings, SSA must plug in "zero" years to get to the 35-year base. And please note that 35 means 35! Despite all the rumors out there, your retirement benefit is NOT based on your highest 5 years of earnings, or your last 10 years of earnings; or any other number of years other than 35.

Here is a related issue based on that 35-year rule. As part of the discussion of long range Social Security reform, you will frequently hear proposals to change the "computation years." A number I've heard most often is adopting a 38-year base. What they are talking about is basing future Social Security benefits on a retiree's highest 38 years, rather than the highest 35. That would have the effect of lowering future benefits because the more base years used, the lower benefits are. Think of it this way: if your retirement computation was based on your high three years of earnings, for example, that would result in a much higher benefit than one based on 35 years. So, adding even more years to the base would lower benefits further.

But now let's get back to the current computation formula. Before they add up those "high 35," they index each year of past earnings for inflation. And this is where the formula starts to get messy. That's because there is a different adjustment factor for each year of earnings, AND each year's adjustment factor is different based on your year of birth.

Here is a quick example. If you were born in 1949, and earned $20,000 in 1980, they would multiply those earnings by an inflation adjustment factor of 3.25, meaning they would actually use $65,000 as your 1980 earnings. But if you were born in 1950 and earned that same $20,000 in 1980, they would use an inflation factor of 3.33 resulting in $66,600 as the 1980 earnings used in your Social Security computation.

You can find a complete breakdown of those inflation adjustment factors for each year of birth (for folks nearing retirement age) at

So the next step in the retirement computation formula is to add up your highest 35 years of inflation-adjusted earnings. Then you divide by 420 — that's the number of months in 35 years — to get your average inflation-adjusted monthly income.

The final step brings us to the "social" part of Social Security. The percentage of your average monthly income that comes back to you in the form of a Social Security benefit depends on your income. In a nutshell, the lower your average wage, the higher percentage rate of return you get. Once again, the actual formula is messy, and varies depending on your year of birth. As an example, here is the formula for someone born in 1949. You take the first $749 of average monthly income and multiply by 90 percent. You take the next $3,768 of your average monthly income and multiply that by 32 percent. And you take any remainder and multiply it by 15 percent.

You can find a complete breakdown of those computation "bend points" at