Your current income significantly impacts the amount of your Social Security benefit. While earning $25,000 this year will contribute significantly to your retirement benefits, the actual amount you’ll receive is a more complex equation.
Simply put, your current income isn’t the only thing that matters. If $25,000 a year is about average for your annual income, you may be entitled to anywhere from $800 to over $1,200 per month. If your income has varied over the last few decades, things can get even more complicated, though.
Understanding Social Security’s structure and how various factors come into play is key to planning for a secure future. Let’s have a look at how you can estimate your monthly benefit if you make $25,000 a year.
How Earnings Affect Social Security Benefits
Your earnings affect all three types of Social Security benefits. However, not all income is equal in this regard. The program focuses on your “covered earnings,” which refers to wages or self-employment income that’s subject to Social Security taxes. Income that wasn’t subject to Social Security taxes doesn’t count.
Social Security taxes are a percentage of your income that’s split between you and your employer. The Social Security Administration uses any taxed income to calculate your Average Indexed Monthly Earnings (AIME). This calculation also considers things like inflation, so it isn’t exactly a one-to-one equation.
Here’s where your $25,000 income will come in. While it will contribute to your AIME, it’s a very small part of it. If you’re approaching retirement and have worked for over 30 years, only your top 30 earning years will be considered. If you made much more in the past (adjusted for inflation), the $25,000 you made this year may not matter at all!
For a deeper explanation, take a look at our complete explainer of how Social Security works.
Let’s take a closer look at how your income is adjusted for other factors:
Other Factors Affecting Your Social Security Benefit
As we’ve explained, your annual $25,000 income plays a role. However, there are three other main factors you need to consider:
- Number of Years You Worked: The longer you contribute to Social Security, the higher your monthly benefit can be. AIME considers your whole working career, not just a single year. Someone who works consistently for 40 years will generally have a higher AIME than someone who works for only 20 years, even if their annual earnings are similar.
- Your Age at Retirement: Your age has a huge impact on your monthly retirement benefit. You can begin receiving Social Security at 62, but you’ll permanently reduce your monthly benefit in the process. The full retirement age is somewhere around 66 or 67, depending on your birth year. If you wait for full retirement, you’ll receive your full benefit. You can also delay retirement to increase your monthly benefit. We have a guide on how much Social Security you can expect by age that explains this in more depth.
- Spousal Benefits: If you’re married, your spouse’s earning history may also play a role in determining your benefits. You may sometimes be eligible to receive spousal benefits, even if your work history is much sparser than your spouse’s. This can be valuable if you’re a stay-at-home spouse or only work part-time.
All of these factors have a huge impact on your monthly benefit potential. While your income matters, it’s important to consider other things.
Estimating Your Social Security Benefit
Now that we’ve explored what factors you need to keep in mind, you’re probably eager to figure out how all these pieces fit together! Luckily, getting an estimated Social Security benefit is pretty easy.
The Social Security Administration provides many online benefit calculators. You can use these to get a pretty accurate estimate of your future retirement benefit. You can input information like your earnings history and estimated retirement age. Then, their calculator will provide an estimate.
There are two calculators you can use:
- Quick Calculator: This calculator requires you to input all information and doesn’t look at your official earnings history. However, as the description states, it is a fast way to get an estimate.
- Accurate Calculator: If you want a more accurate estimate, you should create a Social Security account online, verify your earnings, and then use the provided calculator. This calculator does take a bit more time to use, as you’ll need an online account, but it is more accurate.
Use whatever calculator you have time for! Preferably, you should use the more accurate calculator, but we understand that now everyone has time (or wants) to create an online account right away.
While calculators are important tools for the planning process, it’s important to remember that they are estimates. Future changes to Social Security rules or economic factors could impact the actual amount you receive.
Remember, your income is also adjusted for inflation. If you’re far away from retirement age, your $25,000 in income will likely be adjusted for inflation. Technically, this will increase the number of dollars you receive in retirement, but it should equal around the same purchasing power.
For more help planning for Social Security in retirement, take a look at our complete Social Security guide.
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