Key Takeaways
- AIME (Average Indexed Monthly Earnings) is calculated from the highest 35 years of indexed earnings
- 2025 PIA bend points: 90% of first $1,226 + 32% of $1,226-$7,391 + 15% above $7,391
- Full Retirement Age (FRA) is 66 for those born 1943-1954, gradually increasing to 67 for those born 1960 or later
- Early claiming at 62 reduces benefits by up to 30% permanently; delayed credits add 8% per year until age 70
- Maximum benefit at FRA in 2025 is $4,018/month; maximum at age 70 is approximately $5,108/month
Social Security Benefits
Social Security retirement benefits represent the foundation of most Americans' retirement income. Understanding how benefits are calculated and when to claim them is essential for comprehensive retirement planning.
How Benefits Are Calculated
Step 1: Calculate Average Indexed Monthly Earnings (AIME)
The Social Security Administration (SSA) calculates your Average Indexed Monthly Earnings (AIME) using your highest 35 years of earnings:
- Index past earnings - Historical earnings are adjusted to account for wage inflation using the national average wage index
- Select highest 35 years - Only the 35 highest-earning years (after indexing) are used
- Calculate monthly average - Total indexed earnings divided by 420 months (35 years x 12 months)
| Factor | Description |
|---|---|
| Earnings history | W-2 wages and net self-employment income |
| Indexing year | Earnings indexed to age 60 (two years before earliest eligibility) |
| Zero years | Years with no earnings count as $0 toward the 35-year calculation |
| Maximum taxable earnings | $176,100 in 2025 (earnings above this not taxed or counted) |
Key Point: If you have fewer than 35 years of earnings, zeros are averaged in, reducing your AIME significantly.
Step 2: Apply the PIA Formula (Bend Points)
The Primary Insurance Amount (PIA) is calculated using a progressive formula with "bend points" that provide higher replacement rates for lower earners:
2025 PIA Formula:
| AIME Range | Replacement Rate |
|---|---|
| First $1,226 | 90% |
| $1,226 to $7,391 | 32% |
| Above $7,391 | 15% |
Example Calculation: If a worker's AIME is $6,000:
- 90% x $1,226 = $1,103.40
- 32% x ($6,000 - $1,226) = $1,527.68
- PIA = $2,631.08/month
The bend points are adjusted annually based on the national average wage index. For 2026, the bend points will be $1,286 and $7,749.
Full Retirement Age (FRA)
Your Full Retirement Age determines when you can receive 100% of your PIA:
| Birth Year | Full Retirement Age |
|---|---|
| 1943-1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or later | 67 |
Early Claiming Reductions
You can claim benefits as early as age 62, but benefits are permanently reduced:
| Months Before FRA | Reduction Formula |
|---|---|
| First 36 months | 5/9 of 1% per month (6.67% per year) |
| Beyond 36 months | 5/12 of 1% per month (5% per year) |
Impact of Early Claiming (FRA = 67):
| Claiming Age | Reduction | Benefit as % of PIA |
|---|---|---|
| 62 | -30% | 70% |
| 63 | -25% | 75% |
| 64 | -20% | 80% |
| 65 | -13.33% | 86.67% |
| 66 | -6.67% | 93.33% |
| 67 (FRA) | 0% | 100% |
Example: If your PIA is $2,000 and you claim at 62 (with FRA of 67), your benefit is $2,000 x 70% = $1,400/month for life.
Delayed Retirement Credits
Delaying benefits past FRA earns Delayed Retirement Credits (DRC) of 8% per year (2/3 of 1% per month) until age 70:
| Claiming Age | Increase Above PIA |
|---|---|
| FRA | 0% |
| FRA + 1 year | +8% |
| FRA + 2 years | +16% |
| FRA + 3 years | +24% |
| Age 70 | +24% to +32% (depending on FRA) |
For FRA of 67: Claiming at 70 provides a 24% increase (3 years x 8%) For FRA of 66: Claiming at 70 provides a 32% increase (4 years x 8%)
No credits accrue after age 70, so there is no benefit to delaying beyond that age.
2025 Maximum Benefit Amounts
| Claiming Age | Maximum Monthly Benefit (2025) |
|---|---|
| Age 62 | ~$2,831 |
| Full Retirement Age (67) | $4,018 |
| Age 70 | ~$5,108 |
Maximum benefits require earning at or above the taxable wage base for at least 35 years.
2025 Cost-of-Living Adjustment (COLA)
The 2025 COLA is 2.5%, applied to benefits beginning December 2024 (paid in January 2025). COLA adjustments are based on the Consumer Price Index for Urban Wage Earners (CPI-W) from the third quarter of the prior year.
| Year | COLA Increase |
|---|---|
| 2023 | 8.7% |
| 2024 | 3.2% |
| 2025 | 2.5% |
| 2026 | 2.8% (announced) |
CFP Exam Considerations
For the CFP exam, focus on:
- Understanding the 35-year earnings calculation and its impact on those with career breaks
- Memorizing the bend point replacement rates (90%, 32%, 15%)
- Calculating early claiming reductions and delayed retirement credits
- Recognizing that delayed credits stop at age 70
- Understanding that AIME/PIA calculations use indexed earnings to age 60
A client born in 1960 has a Primary Insurance Amount (PIA) of $2,400. If she claims Social Security benefits at age 62, what will her monthly benefit be?
Which of the following statements about the Social Security PIA calculation is CORRECT?
A client with an FRA of 66 decides to delay claiming Social Security until age 70. What percentage increase above her PIA will she receive?