Sally has just finished her thirty-fifth year with her company and is getting ready to retire. During her thirty-five years, Sally’s average annual salary was $45,603. How much can Sally expect to receive from Social Security annually if she were to retire today?
To determine how much Sally can expect to receive from Social Security annually, we need to know her average annual salary for the 35 years and her retirement age.
Since Sally's average annual salary for the 35 years was $45,603, we will use this amount.
To calculate the Social Security benefit, we need to find the average indexed monthly earnings (AIME). The AIME is determined by applying an indexing factor to Sally's earnings history and dividing it by the number of months (420 months in this case) in her work history.
AIME = (Sum of indexed earnings for the 35 years) / 420
To calculate the Social Security benefit, we need to know the Primary Insurance Amount (PIA), which is the amount a person would receive if they retire at the Full Retirement Age (FRA). The FRA is 65 years and 10 months for those born in 1953, which is not specified in the question. Therefore, we'll assume it's 66 years, the current FRA.
The PIA is calculated based on the AIME and certain bend points (specific dollar amounts that, when multiplied by the applicable PIA percentages, determine the monthly benefit amount). Currently, for someone who turns 62 (the earliest eligibility age for retirement benefits) in 2020 or later, the bend points are as follows:
- The first bend point: $960
- The second bend point: $5,785
For the first $960 of the AIME, the PIA percentage is 90%. For the AIME over $960 up to the second bend point ($5,785 in this case), the PIA percentage is 32%. For any amount over the second bend point, the PIA percentage is 15%.
Now, we can calculate the Social Security benefit as follows:
1. Calculate the AIME:
AIME = Sum of indexed earnings for the 35 years / 420
Assuming the sum of indexed earnings for the 35 years is $1,591,105 (calculated using the average annual salary of $45,603 multiplied by 35), the AIME can be calculated as follows:
AIME = $1,591,105 / 420
AIME = $3,789
2. Calculate the PIA:
For the first bend point ($960), the PIA is $864 (90% of $960).
For the second bend point ($5,785), the PIA is $1,853.12 (32% of $5,785).
To calculate the PIA for the AIME:
The PIA = $864 + ($1,853.12 - $864) = $1,853.12
Therefore, Sally can expect to receive approximately $1,853.12 per month from Social Security if she were to retire today. However, since the question only asks for the annual amount, we can multiply this by 12 to find out the annual benefit amount:
Annual benefit = $1,853.12 * 12
Annual benefit = $22,237.44
So, Sally can expect to receive approximately $22,237.44 from Social Security annually if she were to retire today.
To calculate the Social Security benefits, we need to consider Sally's average indexed monthly earnings (AIME). AIME is calculated by taking the average of her highest 35 years of indexed earnings.
However, since we only have the average annual salary, we'll need to calculate the average monthly salary first.
Step 1: Convert the average annual salary to average monthly salary:
Average monthly salary = Average annual salary / 12
Average monthly salary = $45,603 / 12
Average monthly salary = $3,800.25
Step 2: Calculate the average indexed monthly earnings (AIME):
To calculate the AIME, we will need to adjust Sally's past earnings for inflation using the national average wage index (NAWI) provided by the Social Security Administration (SSA). The NAWI values can be found on the SSA's website for each calendar year.
Since you haven't provided specific earnings for each year, we'll assume a constant income growth rate for the simplicity of calculation.
If we assume a constant income growth rate of 3% per year, we can calculate the indexed earnings for each year using the following formula:
Indexed earnings = Average monthly salary * (NAWI for the year / NAWI for the base year)
Let's assume the base year is the current year (2022).
We'll use the NAWI value for 2022 as the base year, which is not specified, so we'll use the most recent available NAWI for 2021 as an estimate. (You can find the specific NAWI value for 2022 on the SSA's website in the future.)
Step 3: Calculate the indexed earnings for each year:
To calculate the indexed earnings for each year, we'll apply the compound growth formula:
Indexed earnings = Average monthly salary * (1 + growth rate)^number of years
Assuming a constant growth rate of 3% per year:
Year 1: Indexed earnings = $3,800.25 * (1 + 0.03)^1
Year 2: Indexed earnings = $3,800.25 * (1 + 0.03)^2
Year 3: Indexed earnings = $3,800.25 * (1 + 0.03)^3
...
Year 35: Indexed earnings = $3,800.25 * (1 + 0.03)^35
Step 4: Calculate the average indexed monthly earnings (AIME):
Add up the indexed earnings for all 35 years and divide by 35:
AIME = (Indexed earnings year 1 + Indexed earnings year 2 + ... + Indexed earnings year 35) / 35
Step 5: Determine the Social Security benefits:
To calculate the Social Security benefits, we'll use a formula provided by the SSA:
Primary Insurance Amount (PIA) = 90% of the first $996 of AIME + 32% of the next $5,659 + 15% of the remaining AIME
PIA represents the monthly benefit amount a retiree is entitled to at full retirement age (FRA). The FRA depends on the year of birth. Assuming Sally is reaching her FRA, we'll use the FRA for individuals born in 1957, which is 66 and 6 months.
Step 6: Calculate the Social Security benefits:
PIA = (90% * $996) + (32% * ($AIME - $996)) + (15% * ($AIME - $6,655))
Sally can expect to receive the calculated PIA as her Social Security benefit annually if she were to retire today.