If you want to be financially secure in retirement, then making the most of Social Security can be critical in putting together a smart financial plan. The perfect retirement strategy involves a combination of Social Security benefits, private pension payments, and income from your own retirement nest egg. But with many companies no longer offering private pensions, and with the retirement savings crisis in America hampering many people's ability to set enough money aside for their golden years, Social Security is playing an even more important financial role for retirees.
Social Security calculates how much money you get in monthly benefits based on your work history during your career. But no matter how much money you make, there's a maximum amount that Social Security will pay you. Below, we'll take a look at what that maximum amount is, how it's calculated, and what you need to do in order to get as close to that top figure as possible with your own retirement benefits.
What goes into figuring my monthly Social Security payment?
The process that the Social Security Administration (SSA) uses to determine your benefits is long and a bit complicated, but the basic idea isn't hard to understand. The more money you make during your career, the larger your monthly benefit will be. However, there are diminishing returns as your average earnings go up, with higher-income earners seeing incrementally less of an increase as their incomes rise compared to lower-income earners.
Specifically, what the SSA does is to take your earnings history and then figure out which 35 years had the highest earnings after taking inflation into account. Once it has adjusted income figures for those 35 years, it figures out your average indexed monthly earnings over the period. That number then goes into a formula that produces your primary insurance amount. This amount determines what your benefits will be if you retire at full retirement age, and your actual payment will be lower if you claim benefits early or higher if you wait beyond full retirement age to claim.
From that explanation, it might seem that there's no theoretical maximum to how much someone could get in Social Security benefits. However, for every year that goes into the 35-year average calculation, there's a limit on the amount of income that the SSA takes into account. That limit is the same as the wage base limit that determines the maximum amount of Social Security payroll taxes you'll have to pay, which is $128,400 for 2018. So there's some symmetry between taxes paid into the system and benefits taken out of the system.
What's the most I can get?
Looking at the maximum benefit figures for those retiring in 2018 can give you some clues about how this works. If you retire at full retirement age in 2018, then your maximum benefit will be $2,788 per month. Those who claim benefits at 62, the earliest possible retirement age under Social Security, have a lower maximum monthly benefit of $2,158. However, if you wait until age 70, your maximum benefit is much higher, at $3,698 every month.
These three figures show the importance of when you claim. In all of these scenarios, the person getting the maximum benefit had a 35-year career that included earnings that were at least equal to the wage base limit each year. But waiting beyond full retirement age will boost your benefit by 8% for every year that you wait. Taking benefits before you reach full retirement age, on the other hand, can cut what you get every month from Social Security by as much as 25% to 30%.
Yet it also matters how long you work. If your career is less than 35 years, then the SSA will fill in missing years with zeros. That'll bring your average down sharply, having a significant downward impact on what you receive in benefits when you retire.
How to get the most from Social Security
If you want the absolute maximum you can get from Social Security, you should strive to earn at least the wage base limit each year and plan to work a full 35-year career. Then, you should wait as long as possible -- ideally until age 70 -- before claiming your benefits. Even if you don't end up getting to the theoretical maximum benefit amount, your efforts should help you improve your financial prospects in retirement.