How Will Your Social Security Stack Up to the $3,895 Max?

The maximum monthly Social Security benefit for 2021 is $3,895. Very few retirees will actually receive that much, though. Maxing out Social Security requires a long career in a high-paying position, as well as the patience to delay benefits in order to receive the maximum allowed.

Here's how you can determine how your benefits will stack up against the max.

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The Social Security benefits formula

Your Social Security benefit is determined primarily by a single number: your average indexed monthly earnings (AIME). To calculate your AIME, the Social Security Administration (SSA) takes your income during your 35 highest-earning years (adjusted for inflation) and averages it on a per-month basis.

Note that the SSA only counts income on which you paid Social Security tax. For 2021, you only pay Social Security tax on the first $142,800 of income. If you made above the taxable limit for 35 years, you'd be eligible to receive the maximum Social Security benefit.

If you're curious about where you stand today, you can look up your own wage history with a My Social Security account. You can adjust your wage history for inflation using the indexing factors provided on the SSA website. The My Social Security website also offers a benefits estimator tool.

Once you determine your AIME, you can calculate your estimated benefit by using the following table.

Table source: Author.

As you can see, Social Security is a progressive program. It offers a greater percentage of income replacement to lower-earning taxpayers than to those who earned very high incomes. So, even if you're not maxing out Social Security, you're still able to get a good portion of the benefit from just a small level of income.

Getting the most out of the benefits you earned

If you want to get the highest payout from Social Security, you need to delay your payments until age 70. That's because the SSA will pay you to wait to take your benefits. It also provides the option to start taking your benefits early, at age 62, but it will cut your monthly payout in order to do so.

In order to determine how much more you can get by waiting, you need to know your full retirement age (FRA). The FRA for people born before 1955 is 66. The FRA increases by two months for every year after that until it reaches 67 for those born in 1960 or later.

For every month you delay retirement beyond your FRA, the government will increase your benefit by two-thirds of a percent. That adds up to 8% per year. You can only delay retirement until age 70, though.

So, if you claimed Social Security at age 70 in 2021, you'd be four years past your FRA and you'd be eligible for 132% of the monthly benefit you could've taken at 66. If you're planning for the future, you'll likely max out at 124% of the full retirement benefit you calculated above, as the FRA moves to 67.

The maximum Social Security benefit isn't a great deal

If you're even close to maxing out the Social Security benefit, it's quite likely you already have a very solid financial footing. It means you were a high-wage earner for many years, and you should have been saving diligently in retirement and investment accounts along the way, too.

In fact, for some high-wage earners, Social Security can become a tax burden in retirement that requires careful tax planning years in advance to prevent a substantial effective tax increase on capital gains and retirement account distributions. 

If you're an average wage earner and save a modest amount for retirement every year, the average Social Security benefit of $1,555 per month should provide a nice boost to your retirement savings. There's no need to work a lot harder, work longer, or change careers just to max out Social Security. If you have other reasons to do so, though, go for it.