Quickly Understand the Social Security Benefit Formula

A good reference other than the Social Security website is here.

TL;DR Summary of Key Points.

1. You need to earn 40 credits (Max 4 credits can be earned per year) to be entitled.
2. The payout is determined by the average indexed monthly earnings (AIME) — calculated using your total income covered by FICA tax from the top 35 highest-earning years, adjusted for inflation. (Eg, the amount of income where you pay the FICA tax in the top 35 years)
3. If you paid FICA tax for less than 35 years, your total earnings will still be divided by 35 years (420 months) to derive your AIME. Eg, if you have total earnings of $1.26 million qualified, your AIME = 1,260,000 / 420 = $3,000.
4. There is a maximum taxable amount for social security benefits, which is about $ 168.4k for 2024. This means if your taxable income is higher than that, you will be taxed and can only contribute up to a covered income of $168.4k.
5. Don't worry much about undercontributing because once your total income covered reaches a certain amount, there is a diminishing return to your benefit. The term they used is known as bend points. More specifically, if your AIME is below $1,174, you get a 90% benefit. For AIME between $1,174 and $7,078, you get a 32% benefit. Any amount over $7,078 you get a 15% benefit.
6. What this means is, that if your AIME is $1,174, you get a 90% benefit payout which is about $1056.6. For every dollar above $1,174, you only get a benefit payout of $32cent per dollar. And for every dollar above $7,078. You only get a benefit payout of $15 cent.
7. The only good thing is the AIME (and hence the benefit payout) is inflation-adjusted.