(Matthew Frankel, CFP®)
To get the maximum benefit possible from Social Security, there are a few things that need to happen. You must work for at least 35 years in employment covered by Social Security. You need to earn more than the taxable maximum during the 35 of your best years. In 2022, the taxable maximum is $147,000, just to put this in context. And you must wait until age 70 to start collecting your benefit.
If these three things are not true, you will not receive the maximum Social Security benefit possible.
If you’re not getting the most out of it, don’t worry. Most retirees don’t. The most common ages to claim Social Security are 62 and 65, and while many people earn a lot at some point in their careers, few reach the Social Security maximum. every year. In fact, the average Social Security retirement benefit is $1,657 per month, well below the maximum possible.
How your Social Security benefit is determined
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the Social Security Benefit formula is not terribly complex. Here is a summary of how the process works:
- The Social Security Administration keeps track of your wages subject to Social Security taxes for each year of your working life. You can see your earnings history on your last Social Security statement.
- Each year’s earnings are indexed to account for inflation. As an example, $50,000 earned in 2000 is considered to be about $86,500 in 2022 dollars.
- The highest 35 years of earnings are averaged together, and zeros are used if you worked less than 35 years. This average is divided by 12 to calculate your Average Indexed Monthly Earnings (AIME).
- Your AIME is applied to a formula to determine the amount of your primary insurance or PIA. This is what your Social Security benefit would be if you claimed it at full retirement age.
For people who claim Social Security in 2022, this is the formula that applies to your average monthly income:
- 90% of the first $1,024 of average indexed monthly earnings
- 32% of earnings greater than $1,024 but less than $6,172
- 15% of earnings over $6,172
When will you claim benefits?
Even if you earn a lot during your entire career, that’s not enough to maximize Social Security: You’ll need to wait as long as possible to claim your benefits. Eligible workers can choose to start their benefits at age 62 or until age 70, and full retirement age It can be from 66 to 67 years old, depending on what year you were born. In fact, the highest possible Social Security benefit for someone at full retirement age in 2022 is $3,345 per month, well below the maximum of $4,194.
This is why. If you choose to start your benefits before reaching full retirement age, they will be permanently reduced. For someone whose full retirement age is 67 and who claims Social Security at 62, this reduction is a whopping 30%.
On the other hand, if you wait until after your full retirement age, your benefit will be permanently increased by 8% per year up to age 70. For example, if your full retirement age is 67 and you wait until 69 to start, you’ll get a 16% increase over what your benefit would have been.
An example of how a Social Security benefit is determined
As an example, let’s say your average annual indexed earnings over your highest 35 earning years is $75,000, which translates to $6,250 per month. Under the 2022 formula for calculating the PIA, your benefit at full retirement age would be:
- 90% of $1,024 = $921.60
- 32% of the next $5,148 = $1,647.36
- 15% of the next $78 = $11.70
The sum of these three components gives a monthly benefit of $2,580.66 if you retire at full retirement age. If your full retirement age is 67, waiting until age 68 would increase your benefit to $2,787.11. If he can last until he is 70, he would start collecting $3,200 in monthly installments, plus any cost-of-living adjustments made to the Social Security program between now and then.
Now that you know how the Social Security benefit formula works, you’ll be in a great position to maximize yours. You may not get the maximum possible, but you can make choices that could lead to a greater stream of inflation-protected retirement income for as long as you live.
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