Social Security is, for tens of millions of Americans, more than just a monthly check. It represents a financial foundation that keeps millions of retired workers out of poverty.
A study by the Center on Budget and Policy Priorities found that the elderly poverty rate with Social Security income is a mere 8.8%, compared to the estimated 40.5% it would be if there was no such thing as a guaranteed Social Security payout each month to eligible beneficiaries. In total, it keeps an estimated 22.1 million people (including the disabled and survivors) out of poverty. It's simply that important.
This is probably the most important decision retired workers will make
Thus, the most important decision seniors will likely make during their golden years is deciding when to enroll for Social Security benefits. As a reminder, your benefits are based on a combination of your work history, earnings history, when you claim, and your birth year. This last factor we can't control, but it nonetheless determines our full retirement age, or the age we have to wait to in order to receive 100% of our retirement benefit from the Social Security Administration (SSA).
Retired workers, assuming they've earned the prerequisite 40 lifetime work credits needed to qualify for retirement benefits, can begin receiving a payout as early as age 62, or at any point thereafter. There is, of course, a huge incentive if they choose to wait to enroll. For each year they hold off, their eventual payout increases by approximately 8%, up until age 70. In even simpler terms, if you sign up for benefits before reaching your full retirement age (FRA), you'll be accepting a permanent reduction in your monthly payout of up to 30%, depending on when you claim and what your FRA is. Conversely, waiting until after your FRA will actually increase your payout above and beyond 100% by up to 32%, once again depending on when you claim and your FRA.
According to the SSA's November 2017 snapshot of the program, the average retired worker was bringing home about $1,375 a month. That may not sound like much, but it's keeping millions of retired workers above the federal poverty line. Admittedly, though, this is nowhere near what Social Security recipients could earn each month.
The maximum Social Security benefit in 2018
In mid-October, the SSA announced its changes for the upcoming year, which among other things included adjustments to the maximum benefit paid at full retirement age in 2018. The new figure for what is now the current year is $2,788 per month, up $101 from the previous year.
But keep in mind that this is the maximum figure at full retirement age, which in 2018 is 66 years and four months. Benefits can continue to grow all the way until age 70, meaning you can technically earn a lot more than $2,788 a month from the SSA.
Just how much, you ask? That depends on your birth year.
For folks born between 1943 and 1954, waiting until age 70 to lay claim to your benefits boosts your payout by the aforementioned full 32%. Meanwhile, retired workers born in 1956, who just became eligible for Social Security benefits in 2018, will only see a maximum boost of 29.3% over the 100% received at 66 years and four months of age. Translated into dollars, a retiree born in 1956 could earn no more than $3,605 a month by claiming at age 70 (assuming the SSA kept everything static for the next eight years). Those born before 1954, who can earn a 32% boost to their payout, can claim a bit more ($3,680), utilizing the 2018 FRA maximum benefit figure as our baseline. That 167% more than the average retired worker brought home in November 2017.
Earning the maximum Social Security benefit is really difficult
However, earning the maximum Social Security benefit is pretty difficult. Just like earning a perfect credit score, a lot of things need to go your way for an extended period of time.
To begin with, the SSA takes into account your work and earnings history when determining how much you'll be paid monthly when you claim retired worker benefits. It does this by averaging your 35 highest-earning years, adjusted for inflation. So, for starters, if you failed to work at least 35 years, you have no shot at getting the absolute maximum Social Security monthly payout. For each year less of 35 worked, the SSA will average in a $0.
On top of working at least 35 years, your annual earnings (adjusted for inflation) would have had to top the maximum taxable earnings amount in each and every one of your 35 highest-earning years. As of 2018, earned income between $0.01 and $128,400 is subject to Social Security's 12.4% payroll tax, with any earned income beyond this point exempt. The reason this cap exists is because a monthly maximum payout also exists. Thus, a worker would need to earn more than $128,400 in 2018, and have surpassed the cap in either previous years or upcoming years, for 35 years, to qualify for the highest possible payout.
And, of course, a retired worker would have to wait until age 70 to lay claim to his or her retirement benefits. Data from the Center for Retirement Research at Boston College shows that a mere 3% of elderly recipients waits until age 70 to enroll for benefits. Most of these folks who wait probably haven't earned above the maximum taxable earnings amount for 35 years. Thus, the list of maximum Social Security earners is probably very small.
Regardless, Social Security can still play an important role in your retirement. Though it's not designed to be a primary source of income, it can fill in perfectly as a secondary or tertiary income source to ensure you live a comfortable and worry-free retirement.