After reviewing inflation data this year, the Social Security Administration has decided on a cost-of-living adjustment (COLA) of 2% for 2018. The increase means the maximum amount of money a retired worker can collect in monthly Social Security benefits is heading higher next year, but qualifying for that maximum Social Security benefit won't be easy.
Crunching the numbers
Most Americans qualify for Social Security after about 10 years of working. Once you qualify, the amount of money you receive in Social Security benefits depends on a complex formula that converts your historical wages into current dollars and then adjusts that number lower at specific income levels, or "bend points."
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Specifically, Social Security bases your benefit on your highest 35 years of adjusted income divided by 420 (the number of months in 35 years). This gives them your average indexed monthly earnings (AIME).
They then use the bend point multipliers to figure out your maximum monthly Social Security benefit at your full retirement age. Full retirement age varies depending on a person's birth year, but if you were born in 1956 it's 66 years and four months, and if you were born in or after 1960, it's age 67.
In 2017, all that number-crunching works out to an average monthly Social Security check of $1,377 and a maximum benefit of $2,687 per month. In 2018, however, Social Security's COLA and an increase in income that's subject to payroll taxes will expand the average and maximum Social Security benefit to $1,404 and $2,788, respectively.
Getting the biggest check possible
Generally, Social Security replaces about 40% of your pre-retirement income, so if you earn less than the maximum amount of money that's subject to payroll taxes, a pay raise is the single best way to get the biggest benefit possible. In 2017, payroll taxes are collected on income earned up to $127,200, but in 2018, they'll be collected on income up to $128,700.
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If you're already receiving Social Security and you've reached your full retirement age, then a pay raise can still give your benefit amount a nudge higher because Social Security recalculates your benefit amount every year.
If your income is already at the maximum taxable income limit, then the next question is: How long have you been working? Social Security uses the highest 35 years of work history to figure your benefit, so if you've worked fewer than 35 years, continuing to work will replace any zeros in Social Security's calculation. Similarly, if you've worked 35 years but your income currently is higher than it was at the beginning of your career, continuing to work can eliminate low-income years that are weighing down your benefit amount.
Taking advantage of delayed retirement credits is another option. If you delay collecting benefits until after your full retirement age, these credits can increase your payment by 8% per year, up until age 70. Delayed retirement credits can be used to increase your benefit above the maximum Social Security payment, so if you're one of the lucky few who qualifies for the maximum amount, delaying Social Security for a few more years can pay off. For instance, if you're eligible for the maximum $2,788 in 2018, you'll get 129.33% of that amount if you wait to claim benefits until you reach age 70. That will net you $3,605 per month.
Overall, it's important to remember that maximizing your Social Security shouldn't be your only consideration when evaluating your options. You'll want to balance your desire to get the most out of Social Security with you and your spouse's health and retirement goals.
