Did you know that Social Security has a maximum payment? If you didn't, you're not alone. A recent poll conducted by Nationwide shows that Americans commonly think that they'll receive more in Social Security benefits when they retire than they actually will.
The calculation for figuring out your exact Social Security benefit is complex, but you can get a feel for how much you can get in benefits by considering the maximum amount that Social Security is paying to current recipients. Read on to learn the maximum amount that Americans can collect if they retire at age 62, 65, or 70 this year.
The maximum benefit possible
In 2018, the most you can collect in Social Security benefits is $3,698, regardless of your age. While it's true that Social Security is designed to replace approximately 40% of a retiring worker's pre-retirement income, that 40% figure is based on the average American's income. The more you make, the lower the percentage of income Social Security will replace.
The precise amount that Social Security will pay you in benefits when you retire is determined by your average monthly income over your highest-paid 35 years of work. If you work fewer than 35 years, then Social Security uses zeros in its calculation.
Once Social Security has calculated your average monthly income (don't worry, they adjust it for inflation), then it subjects that monthly figure to something called "bend points." These bend points give you credit for a specific proportion of your monthly income at different thresholds. For instance, if you were born in or after 1954, then you would get credit for 90% of your average monthly income up to $895, 32% of any income between $885 and $5,397, and 15% of income above $5,397.
The results from applying the bend points are added together and rounded down to get your monthly retirement benefit at full retirement age, which for people born after 1960 is age 67.
The maximum being paid out at 62, 65, and 70
If you're at the maximum taxable earnings limit and you retire in 2018, then the most you can receive in monthly benefits at age 62, 65, and 70 is $2,158, $2,589, and $3,698, respectively.
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Clearly, waiting to claim Social Security until you're older pays off. That's because Social Security will reduce your payment by a fixed percentage for every month you claim prior to reaching your full retirement age, or the age at which you qualify for 100% of your benefit. Full retirement age varies depending on your birthday, but in 2018, it's 66 years and four months.
If you delay claiming Social Security until after your full retirement age, then your benefit is increased by two-thirds of 1% for every month you wait, up to age 70. If you have fewer than 35 years of work history, waiting also benefits you by increasing your monthly full retirement age benefit amount. Since Social Security uses zeros in its calculation when there are fewer than 35 years, any additional years you work will replace those zeros and increase your benefit.
Holding off on retirement to collect a bigger payout is increasingly common, but planning to retire at 65 or later might not be the best strategy if it means contributing less to retirement savings now. Unfortunately, many people retire sooner than they want because of a job loss or declining health. If that happens to you, and you've saved too little because you've based your retirement savings on the maximum Social Security you can collect, you could run the risk of outliving your money. Therefore, calculating how much to save based on the minimum you can collect in Social Security may be a better approach.