A few lucky retirees are raking in nearly $47,000 in Social Security benefits this year, and that's not including any spousal or family benefits their relatives qualify for. Having that kind of guaranteed income would make retirement a lot easier for most people, but figuring out how to get there is another story.
The answer is both simpler and more complex than you might imagine. Below, we'll look at exactly what it takes to rake in the $3,895 maximum monthly Social Security benefit.
How to get the maximum Social Security benefit, step by step
Here's a quick breakdown of the steps the Social Security Administration takes when calculating your benefit:
Step 1: Find your AIME
The first step is to calculate your average indexed monthly earnings (AIME). This is your average monthly income over your 35 highest-earning years, with adjustments for inflation. For example, if you earned $50,000 per year, adjusted for inflation, every year for 35 years, you'd calculate your AIME like this:
($50,000 x 35 years) / 420 (the number of months in 35 years) = $4,167 AIME
Those who haven't worked for at least 35 years have some zero-income years factored into their calculation, which reduces their benefit. Those who work more than 35 years, on the other hand, see their lowest-earning years replaced by higher-earning years, resulting in a larger benefit.
In most cases, your annual earnings and the amount you pay Social Security taxes on are the same, but this isn't true for high earners. In 2021, you only pay these taxes on the first $142,800 you earn. This limit was lower in prior years.
So if you want to earn the maximum Social Security benefit, you need to earn the equivalent of at least $142,800 in 2021 dollars in 35 different years. Not an easy task for most people.
Step 2: Apply the Social Security benefit formula
Once the Social Security Administration has your AIME, it plugs it into the applicable Social Security benefit formula. Here is the formula for 2021:
- Multiply the first $996 of your AIME by 90%.
- Multiply any amount between $996 and $6,002 by 32%.
- Multiply any amount over $6,002 by 15%.
- Total your results from Steps 1 to 3 and round down to the nearest $0.10.
In this example, $996 and $6,002 are known as the bend points. These change annually to account for inflation, and that's what sets one benefit formula apart from another. The formula the Social Security Administration uses to calculate your benefit is the one for the year you turned 62. This is true even if you don't claim benefits until much later.
The result from this step is known as your primary insurance amount (PIA). Returning to our example of a $4,167 AIME from the step above, we'd end up with a PIA of $1,911 if we used the benefit formula above.
That's how much you'd get if you signed up for Social Security at your full retirement age (FRA). Your FRA is 66 if you were born between 1943 and 1954. Then, it rises by two months every year thereafter until it reaches 67 for those born in 1960 or later.
You don't have to sign up right at your FRA if you don't want to, but if you don't, Social Security runs another calculation that decides how much you get per month.
Step 3: Adjust your benefit amount based on your starting age
Signing up for Social Security before your FRA reduces your checks. You lose 5/9 of 1% per month if you claim up to 36 months before your FRA. Those who claim more than 36 months before their FRA lose an additional 5/12 of 1% per month. That means those who sign up right away at 62 only get 70% of their PIA if their FRA is 67 or 75% if their FRA is 66.
Delaying benefits past your FRA is also an option. In that case, your checks grow by 2/3 of 1% for every month you wait until you hit your maximum benefit at 70. This is 132% of your PIA if your FRA is 66, or 124% if your FRA is 67.
So if you have a PIA of $1,911 and a FRA of 67, you'd only get about $1,338 per month if you signed up right away at 62. But you could get up to $2,370 per month if you waited until 70.
If you want the largest possible Social Security benefit, you must delay benefits until 70 when you qualify for your largest checks. Seniors with sizable nest eggs and good health may be able to afford to do this, but those with little savings or serious health issues are often better off signing up early, even if it means getting less out of the program.
How to get your largest Social Security benefit
Though we'd all like to receive $3,895 from the government every month, that's not going to happen for most people. It demands an extremely high income and the patience to delay benefits until you're 70. But that doesn't mean the discussion we've had up until this point is useless.
You can still use the tips we touched upon above to get the largest Social Security benefit you can. Try your best to:
- Work at least 35 years.
- Boost your income as much as you can during your working years.
- Delay benefits if you believe it makes sense for you.
Taking these steps will help ensure you qualify for your largest Social Security benefit, and this will ease the strain on your personal savings in retirement.