Social Security provides critical assistance to tens of millions of retired workers, the disabled, and even the families of deceased workers. According to the Social Security Administration (SSA), almost 61.5 million beneficiaries were receiving a monthly payout from the program in July 2017, 42 million of which were retired workers. Some 61% of these retirees, including 71% of elderly unmarried folks, rely on their guaranteed monthly check from the SSA to account for at least half of their income.
Though the SSA suggests that beneficiaries only rely on Social Security to replace about 40% of their working wages, it's pretty clear from the data that a lot of current retirees are far more reliant than that. This makes it all the more likely that, with personal saving rates remaining poor (3.5% as of July 2017), future retirees will also lean heavily on Social Security income during retirement.
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The true maximum annual benefit from Social Security
Given how much Americans rely on Social Security to make ends meet during retirement, workers need to do what they can to maximize their eventual payout.
What is the "maximum" that a retiree can hope to net from Social Security, you ask? According to the October 2016 update from the SSA, the maximum monthly payout at full retirement age in 2017 is $2,687. This maximum tends to move in step with the National Average Wage Index most years, unless Social Security's cost-of-living adjustment (COLA) is 0%, in which case the maximum benefit at full retirement age remains static from one year to the next until there's a positive COLA.
However, this $2,687 figure isn't the true "maximum." This is merely the maximum monthly benefit at a person's full retirement age, which is the age at which the SSA deems you eligible to receive 100% of your base benefit. Should you choose to wait longer to enroll for benefits, depending on your birth year, your payout could grow by up to an additional 32%, up until age 70. This means a high-earning individual who is eligible for the maximum benefit amount could wait all the way until age 70 to file for retirement benefits, ultimately receiving $3,538 a month from the SSA in 2017. Over the course of a year, we're talking about a healthy income of $42,456. Comparatively, the average retired worker is only bringing home $16,440 a year from Social Security, which is only a few thousand dollars above the federal poverty level.
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Three things you'll need to do to reach this true maximum benefit
So, how can you receive $42,456 a year from Social Security? It all starts with three factors that you control and a fourth that you can't.
First, you'll want to work for a minimum of 35 years, because the SSA takes into account your income in your 35 highest-earning years when calculating your monthly benefit. For every year you fall short of 35 working years, you'll have a $0 averaged into your annual earnings, which will weigh on your eventual payout. It may also help to work beyond the 35-year mark so as to replace years of lower earnings. You'll presumably have more earning power in your 50s and 60s than you had in your 20s thanks to the skills and experience you've accumulated.
Secondly, and building on the first point, you'll want to earn as much as you can in the years you do work. In order to maximize your payout from the SSA, you'll want to aim to earn at least the maximum taxable earnings cap each year. In 2017, the maximum taxable cap is $127,200, although this cap usually increases with inflation most years. This cap signifies how much earned income is taxable by the SSA ($0.01-$127,200), and what earned income escapes the 12.4% payroll tax ($127,201 and up). Around 10% of the population earns more than $127,200 annually as of 2017, meaning around 1 in 10 people are earning enough this year to theoretically receive the maximum annual payout from Social Security. However, you'll need to average more than Social Security's maximum earnings cap for 35 years in order to truly have a shot at $42,456 a year from the SSA (in 2017 dollars).
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The last thing you'll need to do is wait. Your Social Security benefits increase by approximately 8% each year that you hold off on filing a claim, beginning at age 62 and ending at age 70. If you enroll for benefits at any point before reaching your full retirement age, you'll receive a permanent reduction in your monthly payout of up to 30%. Similarly, waiting past your full retirement age to enroll means raising your payout by up to 32%. In order to truly maximize your payout, you'd need to wait until age 70 to file your claim.
Your maximum benefit may be constrained by your birth year
The one factor you can't control is your birth year, which is what determines your full retirement age. For example, folks born between 1943 and 1954 with a full retirement age of 66 can choose to wait until age 70 to take Social Security benefits and net up to a 32% bonus over their full-retirement-age benefit. Comparatively, people born in or after 1960 have a full retirement age of 67. If these folks wait until age 70, they can only boost their payout by a maximum of 24% over their full-retirement-age benefit. You can use this handy table from the SSA to figure out your personal full retirement age.
The real question is: Should you wait and maximize your payout? For some people, waiting simply isn't an option. If you're not in the best of health, if you're the lower-earning spouse in your household, or if you're struggling to find work and generate income, then filing early may make sense. Conversely, if you're relatively healthy, and you've saved very little or nothing for retirement, then working longer and waiting until age 70 to file is perhaps the smartest thing you can do. After all, if you're going to be reliant on Social Security income during retirement, you should aim to get the biggest annual payment possible.
