According to Motley Fool personal finance expert Robert Brokamp, the process centers on three concepts: average indexed monthly earnings, known as AIME; Social Security’s “bend points”; and the primary insurance amount, or PIA. Claiming before or after full retirement age can then permanently change the benefit.
How 35 Years of Earnings Become a Monthly Benefit
Social Security begins with a worker’s 35 highest-earning years. Earnings from years before the worker turns 60 are adjusted for wage inflation using the national average wage index. Those 35 years are added together and divided by 420, the number of months in 35 years. The result is the worker’s AIME. If someone has fewer than 35 years of earnings, years without earnings are counted as zeros, which can lower the average. There is also a limit on how much annual income is included. According to Brokamp, the maximum amount of earnings subject to Social Security taxes in 2026 is $184,500.
Once AIME is established, Social Security applies a tiered formula using bend points. For workers turning 62 in 2026, the source identifies bend points of $1,286 and $7,749. The calculation applies replacement percentages of 90%, 32%, and 15% across the relevant portions of AIME. The resulting figure is the primary insurance amount, which represents the benefit payable at full retirement age.
The formula is designed to replace a larger share of income for lower earners. According to a Social Security Administration report, a worker born in 1960 with average career earnings of $32,400 would have 55% of pre-retirement income replaced at age 67. The replacement rates listed are 41% for $72,000 in average earnings, 34% for $115,000, and 27% for $178,000.
Claiming Age Can Permanently Change the Payment
The PIA is not necessarily the amount a retiree will receive. The final benefit depends on when the worker claims Social Security relative to full retirement age, which varies by birth year. For someone born in 1960 or later, full retirement age is 67. Claiming at 62 can permanently reduce the benefit by as much as 30%, while delaying until 70 can increase it by about 24%, according to Brokamp. The timing decision can also affect benefits connected to the worker’s earnings record, including spousal and survivor benefits, as well as the family maximum.
Social Security benefits also receive annual cost-of-living adjustments based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Motley Fool notes that people who are eligible but have not yet claimed benefits still receive those inflation adjustments in the calculation of their future benefit.
Workers can estimate their retirement income through their Social Security statement at ssa.gov/myaccount. Yet those estimates assume future earnings will remain at the same annual level as the most recent income recorded by the Social Security Administration.
That assumption can matter for people who plan to reduce their hours, retire before claiming, or experience a substantial change in income. In those cases, the source points to the Social Security detailed calculator as a way to model different future earnings patterns more closely.
