How to Get the Maximum Social Security Benefit

The maximum Social Security retirement benefit you can collect in 2020 is $3,790 per month, but very few people will receive that big of a payday. Why? Because Social Security benefits are based on each person's work history, including how many years they worked, how much they earned per year, and when they decided to begin receiving their benefits. Qualifying for Social Security's maximum benefit requires decades of high-income employment, plus the patience to put off claiming benefits as long as possible. While most people won't receive the maximum benefit in retirement because of these hurdles, there are still ways to increase the size of your Social Security check substantially. 

The formula Social Security uses to calculate your benefits

Understanding how to maximize your Social Security requires an understanding of how Social Security works, including how your benefits are determined. The formula for calculating benefits is complicated, but I'll lay out a simple example after I explain the details. 

IMAGE SOURCE: GETTY IMAGES.

First, you should know that you'll only qualify for Social Security if you accumulate 40 work "credits." Social Security credits are awarded based on earned income, and you can earn up to four credits per year. The amount you must earn to collect each credit changes every year, but in 2020, you'll receive one credit for each $1,410 in earnings subject to payroll taxes. As long as you earn at least $5,640, you'll receive the maximum four credits next year. Overall,  most workers earn enough money to qualify for Social Security benefits in about 10 years.

Assuming you qualify for benefits, then Social Security determines how much it will pay you by calculating your average indexed monthly earnings (AIME), which it then uses to determine your primary insurance amount (PIA), or the amount you can collect at full retirement age. 

Your AIME is the average, inflation-adjusted, taxable income you earned during your 35 highest-earning years.

To adjust your historical earned income for inflation, Social Security uses the Average Wage Index (AWI), a measure of average national income subject to federal income taxes plus contributions to deferred compensation plans like a 401(k). Social Security indexes your historical earnings based on the year you turn 62 (the soonest you can claim Social Security), but because there's a two-year lag to its AWI measure, your income is actually inflation-adjusted by the AWI for the year you turn age 60.

Once Social Security adjusts your income for inflation, it totals your highest 35 years of income and then, divides the sum by 420, which is the number of months in 35 years. If you worked fewer than 35 years, then Social Security plugs zeros into your AIME calculation for those missing years. Therefore, if you worked 25 years, your work record would include 10 years' of zeros, substantially lowering your benefit amount.

To calculate your primary insurance amount, Social Security divides your AIME into three buckets based on income thresholds called bend points. It then multiplies the amount in each bucket by a fixed percentage and then, adds those results together to come up with your primary insurance amount.

Bend point amounts are adjusted annually, but in 2020, the first bend point occurs at $960 and the second bend point occurs at $5,785. The percentage applied to each of the three different portions of your AIME are fixed:

Source: Social Security Administration.

Using the bend points for 2020, your primary insurance amount is therefore the sum of:

• 90% of your AIME up to $960;
• 32% of your AIME between $960 and $5,785; and
• 15% of AIME above $5,785

Make sense? If not, don't worry. Here's an example of how they'd calculate your monthly retirement benefit at your full retirement age if your AIME is $5,900:

0.9($960) + 0.32($5,785-$960) + 0.15($5,900-$5,785)

Now let's simplify that:

0.9($960) + 0.32($4,825) + 0.15($115)

Just one step left:

$864 + $1,544 + $17.25 = $2425.25

When you claim matters (a lot)

The above calculation is used to decide how much you'll receive in monthly benefits at full retirement age, but you'll get a lot less than that amount if you rush to claim your benefits early, and you'll get a lot more than that if you're patient and delay claiming your benefits as long as possible. Why? Because Social Security is designed to pay the average person the same amount of money in lifetime benefits regardless of when he or she begins receiving them.

If you claim earlier than full retirement age, you'll receive more monthly checks during your lifetime, but they'll be for less money. If you claim later than full retirement age, you'll receive fewer monthly checks during your lifetime, but they'll be bigger.

So, what exactly is full retirement age? First, let's dispel a myth. Many people think full retirement age is 65. That's only true if you were born in 1937 or earlier. If you were born after 1937, then full retirement age varies from age 65 to age 67, depending on your birth year. 

Source: Social Security Administration.

Remember, you only get 100% of your primary insurance amount if you claim at full retirement age.

Now, let's dig deeper into the reduced payments associated with claiming earlier than full retirement age and the increased payments associated with claiming later than full retirement age.

Social Security allows you to begin receiving benefits as young as age 62. However, if you claim early, it permanently lowers your benefit by five-ninths of 1% for each month you claim early, up to 36 months. If you claim early by more than 36 months, it further reduces your payment by 5/12 of one percent per month.

Those reductions really add up. For example, if your full retirement age is 66 and you claim at age 62, you'll only receive 75% of your full retirement benefit, and if your full retirement age is 67, claiming at 62 results in you collecting just 70% of your primary insurance amount. 

Certainly, there are good reasons why people claim early, including declining health, but it's not a way to maximize your Social Security income. If your goal is to get the biggest monthly benefit check, you'll want to wait as long as possible to claim to take advantage of Social Security's delayed-retirement credits.

Until age 70, Social Security will award you a delayed retirement credit for every month you hold off filing for benefits. Each of these credits boosts your payment by two-thirds of 1%, so delaying one year nets you an 8% boost to your benefits. Therefore, if you're full retirement age is 66 or 67, then waiting until age 70 to claim allows you to pocket 132% or 124%, respectively, of your full retirement benefit. 

How to get the biggest Social Security check

As I mentioned, the maximum amount you can receive in benefits in 2020 is $3,790 per month, but to get that payout you must have earned at least the maximum amount of income subject to payroll taxes for at least 35-years during your career. And, you must have waited until age 70 to file to take advantage of all of your delayed retirement credits.

Since the maximum earnings subject to Social Security payroll taxes is $137,700 in 2020, and over two-thirds of workers earn less than $100,000 per year, the income requirement is a hurdle few people clear.  As you can see in the following chart, most retirees wind up collecting between $700 and $2,400 per month in Social Security benefits.

Author's chart.

Having said that, there are still strategies you can employ to make sure you get this biggest benefit possible and now that you know Social Security's ins-and-outs, these strategies should make sense to you:

• If your income is below the maximum taxable earnings level, the single best way to a bigger Social Security check is negotiating annual pay increases with your employer or considering a side hustle 
• If your work history is shorter than 35 years, then working even part-time later in life can eliminate zeros from your AIME calculation, thereby increasing your benefit.
• If your work history includes over 35 years and your earnings are higher today than they were in the past, continuing to work so that you replace low-earning years in your AIME calculation will also boost your benefit.
• If you're in good health, consider waiting until age 70 to claim your Social Security.

Since Social Security is based on income, it's probably not surprising that annual pay increases have a big impact on your future benefit. In fact, even small increases can substantially increase your future Social Security income. For example, if you start out earnings $50,000 per year and you get a 3% pay increase every year, then your average indexed monthly earnings would be $7,198 per month, or 72.7% higher than if you'd never gotten a raise during your career.

Similarly, you shouldn't underestimate the positive impact associated with removing zeros and low-earning years from Social Security's calculation. For instance, let's say you were born in 1960 and you plan on retiring at your full retirement age, which is 67 years old. If your 35 years of inflation adjusted annual earnings is $40,000, then your primary insurance amount would be $2,353, based on Social Security's online calculator. However, if you only had 25 years of earnings instead of 35, Social Security would use 10 years of zeros in its calculation, resulting in a primary insurance amount of just $1,603 at age 67. As you can see, those zeros are costly, so it pays to get rid of them, even if you're only replacing them with part-time income later in your life.

Finally, delaying to take advantage of retirement credits is a sure-fire way to supersize your Social Security income. Not only will claiming at age 70 net you all the delayed retirement credits possible, it will also keep you from falling victim to Social Security's annual earnings test, which limits how much money you can earn before triggering a withholding of some of your Social Security benefits.

If you're younger than full retirement age and you claim benefits, then the maximum amount you can earn without failing this test is $18,240 in 2020. Earn more than that and Social Security will withhold $1 for every $2 earned above that limit. A separate rule applies for the year in which you reach full retirement age. If you reach full retirement age in 2020, you can earn up to $48,600 in the months prior to turning full retirement age. If you earn more than that, then Social Security will withhold $1 for every $3 earned above that limit. Once you reach your full retirement age, none of your benefits are withheld no matter how much money you earn, so delaying ensures you avoid a smaller than expected Social Security check because of this test.

As an aside, if you're committed to retiring early, then it could be smart to limit earnings from work by relying on money you withdraw from a Roth IRA. Since Roth IRAs are funded with after-tax money, any withdrawals from them aren't included in Social Security's earnings test. Furthermore, because Roth IRA withdrawals don't count as income, they can help you avoid paying income taxes on your Social Security benefits. If your taxable income exceeds an annual limit ($32,000 if married, filing jointly in 2020), then up to 85% of your Social Security can be subject to income taxes. 

IMAGE SOURCE: GETTY IMAGES.

Maximizing Social Security for couples

If you're married and don't want to wait until age 70 to start receiving Social Security income, you might want to consider claiming the lower-earning spouse's benefit first, so the higher-earning spouse can make the most of delayed-retirement credits.

For example, let's assume you and your spouse have a full retirement age of 67, you're both the same age, and each of you qualifies for Social Security on your own work record. Furthermore, let's assume your primary insurance amount is $2,000, while your spouse's primary insurance amount is $1,000.

If you wait until age 70 to claim, then you'll receive $2,480 per month because of delayed-retirement credits, which is $480 more per month than you'd have gotten if you'd claimed at age 67. Conversely, if your spouse waits until age 70, then they'd only receive $240 more per month than they would've gotten at age 67.

Since delaying the higher earner's benefit nets the bigger boost to benefits, waiting as long as possible to claim it makes more sense than claiming it early.

Additionally, holding off on the higher-earner's benefit can put the longer-living spouse in the best financial position. That's because surviving spouse's can collect 100% of whatever benefit was being paid to the deceased spouse, so long as the surviving spouse has reached full retirement age. Because a surviving spouse can't collect both a survivor benefit and their own benefit, delaying the higher earner's benefit results in the highest income for the widow or widower.

One final thing to keep in mind

There's no magic age to begin receiving Social Security. Everyone's situation is going to be different, so maximizing Social Security income shouldn't be the only thing you consider when deciding what's best for you and your family. You'll also want to base your decision on your health, retirement savings, retirement goals, employment options, and of course, expenses. Once you've done that, then you can figure out which benefit boosting strategies are right for you.