In 2022, some seniors are receiving a $4,194 monthly Social Security benefit, the maximum available. But not many. According to the Social Security Administration, the average monthly benefit for retirees in 2022 is $1,623.
The maximum Social Security benefit might sound like a huge amount, but even if you are getting this much, chances are it's not nearly enough to make ends meet.
$4,194 a month isn't as generous as it sounds
The harsh reality about Social Security benefits is that they are meant to replace only around 40% of pre-retirement income. And for some people, they replace a much smaller percentage.
Your benefits are calculated based on average earnings during the 35 years when your wages were highest (after adjusting for inflation). To be eligible for a $4,194 Social Security check, you would have needed to earn the maximum income that is subject to Social Security tax for a period of at least 35 years. And then, you would have had to wait until age 70 to maximize delayed retirement credits.
Each year, the Social Security Administration (SSA) sets the maximum taxable income, called the wage base limit. In 2022, it's $147,000. The SSA regularly adjusts the limit for inflation, but as you can see, it's very high, relatively speaking. If you earned less than the wage base limit in any one of the 35 years that count in your formula, you're ineligible for a $4,194 benefit. If you earned more than the wage base limit in any given year, those wages won't offset any years when you didn't reach the limit.
If you're used to earning the inflation-adjusted equivalent of $147,000 or more for 35 years, suddenly dropping to $50,328 per year (the equivalent of $4,194 per month) would be a huge pay cut. You probably would not want to reduce your standard of living by so much, which is why the max benefit wouldn't be enough even though it's much more than most seniors get (the average monthly benefit is $1,669).
Everyone needs savings to supplement Social Security
Understanding how much you would need to earn to max out your Social Security checks is helpful for a few reasons.
First, it underscores the fact that most people are going to get much less than the maximum benefit. Unless you earn the inflation-adjusted equivalent of $147,000 for 35 years and claim Social Security at 70 to max out your delayed retirement credits, that maximum benefit is a fantasy for you.
And the bigger the gap between your earnings and $147,000, the smaller your retirement check will be relative to the maximum. Most people can expect to receive closer to the average benefit, clearly not enough to live on without extra money coming in.
Second, it shows that even when a Social Security benefit sounds large, any retiree who tries to depend on it alone is going to take a huge pay cut. You cannot live on 40% or less of what you once made. So be sure to start saving and investing throughout your career -- using tax advantaged accounts like a 401(k) and IRA -- so you don't have to try.