What’s Your AIME & PIA?
Yesterday we discussed the MOST important aspect of your retirement planning; what your expenditures will be in retirement.
Today comes the 2nd most important; Social Security.
Now, let’s start with the agreement that Social Security “was never supposed to be blah, blah, blah…” I get that.
Social Security WAS supposed to be just one leg of a three legged stool. The other two being your savings and pension.
Guess what? Times change. And now Social Security represents a significant portion of most Americans retirement income, if not the SOLE source of income.
Is this a bad or good thing is simply irrelevant now. It just is. Instead of dealing in silliness, like Socialism will work THIS TIME, let’s deal with the real world, shall we?
Oh, and by the way, for folks who dismiss Social Security and say things like “it was never supposed to be represent your entire income…” yeah? Well, that was back when taxes on Social Security were a mere 1% and only to the person too!
Have you checked your FICA taxes lately? Social Security taxes are 12.4%, employee and employer. So, tell me again why we should even consider what Social Security was “supposed to be” in today’s world?
Now that we’ve settled into what Social Security actually IS, let’s talk about it’s significance for you, the retiree.
Social Security will probably represent the bulk of your retirement income. I know it will for Charlotte and me. And, frankly, I’m quite okay with that. As Social Security is taxed very favorably AND it has an automatic Cost of Living Adjustment, AND (AGAIN) it’s 100% backed by the safest entity in the world, the US Government.
(Please folks, when people start yammering about the imminent collapse of the US Dollar, simply ask what’s going to replace it. When the doomsayer hems and haws enough just walk away. Life is too short.)
Can we now accept that like it or not, Social Security is a critical component of your retirement plan? Yes? Let’s move on then.
After reading the previous email you and your lovely spouse did the calculation and have come to realize you’ll probably need around $4k a month in retirement to be comfortable.
Now the next thing you should ask is where is that money going to come from? Let’s say you were that Hopeful Retiree (HR) from yesterdays’ email. You have $200k in your various retirement accounts. The advisor you went to see said you could take 4% a year ‘safely’ from that account.
I disagree. I’m very comfortable with 5%. I’ll explain that rationale in a different email but for now we can calculate 5% of your $200k portfolio equals $10k a year. So, your portfolio represents around 20% of your income needs.
We still need to come up with the remaining income needs of $38k. HOW CAN WE DO THIS???
Simple, basic Social Security planning and it all starts with your AIME, your Averaged Indexed Monthly Earnings.
Remember yesterday we had you making $100k a year. But it turns out you only were making that kind of income in the last 2 years when you got a nice promotion. Before that you were making around $65k. In fact throughout your career you were making the equivalent of $65k in today’s dollars.
With THAT piece of crucial information we can quickly calculate your AIME. Here’s a video I did on the step-by-step method of calculating your AIME.
$65k x 35 = $2,275,000/420 = $5416.
Now, with an AIME of $5416 we can quickly calculate your Primary Insurance Amount (PIA). Your PIA is the amount you’ll receive at your Full Retirement Age (FRA) which will be between 66 and 67 depending on your year of birth.
For 2019 the formula works like this.
First $926 X .90
Next $4657 X .32
Above $5583 X .15
So, here we have:
$926 X .90= $833 and
($5416-$926)= $4490 X .32= $1437
$1437 + $833 = $2270
So your PIA is $2270. That is your Social Security benefit at your Full Retirement Age.
But wait, there’s more!
We’ll say your spouse only worked 15 years averaging $35k a year over that time. You still need to factor in her benefit too.
Simple. $35k x 15 = $525,000. Divide that by 420 and you get an AIME of $1250.
How do I get those numbers? See the video here.
The first $933 X .90 = $833
The next $324 X .32 = $104
Her total benefit at her FRA will be ($833 + $104) = $937.
But because her own benefit is less than half of yours, she’ll get a “bump up” to HALF of your benefit which means her Social Security benefit at HER FRA will be ($2270/2) = $1135.
So now let’s take your benefit, $2270 and add her benefit, $1135 and we get a total Social Security benefit of $3405, or $40,860 a year.
Add that amount to the $10k a year we were going to take from our portfolio and we have an annual retirement income of $50,860, nearly $3k a year MORE than what we already established we need in retirement. Not too shabby, eh? (Just on a side note, NONE of that $50,860 is subject to Federal income tax either! Oh, I know there’ll be naysayers who say otherwise…but they’re wrong. Maybe in my next email, I ‘ll once again establish how this works. If that want me to do that please let me know)
And you see how important these two numbers are. Income need in retirement and then and ONLY then source of income, STARTING WITH SOCIAL SECURITY!
And those, my friends, are the TWO most important numbers you need in your retirement plan. Everything else is tertiary and should only be looked at AFTER these two most critical numbers are established.
I’m ALWAYS looking for ideas that are interest to my audience here. Something you want me to talk about? Please let me know.