Primary Insurance Amount – What Exactly Is It?

Every year the Social Security Administration sends out a summary of projected Social Security benefits to every American citizen who works, or has ever worked. This summation is an estimation of the amount of money you will receive from Social Security based on the age you might retire and how much you have earned by working thus far in your life.

This figure is calculated by using the PIA, or Primary Insurance Amount. This is the basis for all benefits that will ultimately be paid to every individual and / or their beneficiaries. And, like so many numbers in the world of finances, it is variable. It depends on the age when you choose to retire and your AIME, or Average Indexed Monthly Earnings.

First a few definitions:

AIME – Average Indexed Monthly Earnings. To determine the Social Security retirement or disability benefits of an insured worker, that worker’s earnings are adjusted to take into consideration the changes in wages during his or her employment history. This is done so that Social Security benefits take into account the rise in the cost of living. The years in which the most money was earned are the years utilized to calculate the average. The number of years used can be up to thirty-five.

FRA – Full Retirement Age, also known as the normal retirement age, regulates when you can receive your whole retirement benefit. If you choose to retire earlier than the normal retirement age, you will receive a lesser portion of your benefits. Of course you can also increase the amount of benefits you will receive by waiting to retire until after normal retirement age. But how exactly do you figure out your Full Retirement Age?

Fortunately, this answer is a simple one. If you were born…

  • in1960 or later, your FRA is 67.
  • between the years of 1955 and 1959, your FRA is 66 plus 2 months for each subsequent year.
  • between the years of 1943 and 1954, your FRA is 66.
  • between the years of 1938 and 1942, your FRA is 65 plus 2 months for each subsequent year.
  • in 1937 or earlier, your FRA is 65.

Now you are ready for a few calculations. In 2010, the following formula applied for determining your Primary Insurance Amount:

  • Ninety percent of the first $749 of your Average Indexed Monthly Earnings
  • Thirty-two percent of the next $749-$4,517 of your AIME
  • Fifteen percent of any amount above $4,517

These figures are called bend points and, as mentioned earlier, are changeable year after year. If you add the sum of these three percentages together (and round down to the next lowest multiple of $0.10), you will have your Primary Insurance Amount.

Your Primary Insurance Amount will also change based on a cost of living adjustment, future years where you may make higher wages, and the age that you begin receiving retirement benefits.

Although calculating the benefits you will eventually receive from the Social Security Administration is a somewhat arduous task, it is comforting to know that there is a plan in place for all of us when we unavoidably reach the age when it will be of need.

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