Social Security pays retirees personalized benefits based primarily on how long they worked in covered jobs, the amount they earned in those jobs, and the age at which they choose to collect. The formula involved to calculate those benefits is somewhat complicated. Despite that complexity, all three of those key factors have limits on the upper end of their values. That makes it straightforward to figure out how to maximize your benefits.
That's the good news. The not-so-good news is that while it's straightforward to understand exactly how to optimize for the $4,194 Social Security monthly max, it's a very tough number to hit in practice. Still, understanding how those factors all work together might be able to help you get close enough to have Social Security provide a decent chunk of money every month for your retirement. With that in mind, here are the details on those three key factors and how to use them to maximize your benefit.
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No. 1: Earn a high salary
Every year, Social Security publishes a maximum covered salary amount. Earnings up to that amount are taxed as part of the Social Security program and also go into calculating your benefit. For 2022, the maximum salary amount is $147,000. If you earn more than that within the year, any salary above that amount won't be subject to Social Security taxes, and it also will not count toward your Social Security benefits.
Your earnings from work must be at or above the annual maximum for each year included in your benefit calculation in order for you to receive the highest possible Social Security benefit. If you earn less, your benefit will be less, but it's not a one-for-one loss.
Social Security uses a series of "bend points" in its formula that make the first dollars you earn in a year more valuable than the later ones. As a result, a shift between $20,000 and $30,000 of earnings per year matters much more than a shift between $135,000 and $145,000.
No. 2: Keep up that high salary for 35 years
Social Security uses the highest 35 years of your covered earnings to calculate what your benefit amount will be. If you work for fewer than 35 years, you will have years with $0 earnings in your record. If you work for more than 35 years, Social Security will keep and consider only the highest-earning 35 years in your record.
Do note that there's an adjustment index involved to help even out the fact that the maximum covered earnings amount changes each year. As a result, if you earned the maximum of $76,200 in 2000 as well as the maximum of $147,000 in 2022, the impact of the two years would be pretty comparable to each other. That's despite the fact that the absolute dollar amounts are more than $70,000 apart.
Because that maximum amount adjusts each year, you'll have to keep an eye out for what the adjusted earnings value will be for the next year when it gets announced the previous October. That way, you'll be able to make plans that give you a shot to keep up with the next year's increase while there's still time to make the necessary adjustments.
No. 3: Wait until you turn 70 to collect
If you're already fairly deep into your career, this last step will likely have the biggest impact on how much Social Security you can collect each month. Social Security adjusts your benefit based on the age you are when you start collecting. You can start collecting as young as age 62, and the longer you wait between your 62nd birthday and your 70th, the higher each monthly check will be.
Of course, there is a fairly obvious trade-off with this choice: The later you wait to collect, the fewer total checks you will receive over your lifetime. That trade-off is a key reason why you might actually want to start collecting Social Security before you reach age 70. Still, if your objective is to get the absolute maximum monthly benefit out of the Social Security system as is allowed, then waiting until 70 to start collecting is a key part of that strategy.
Whether you max out Social Security or not, put these factors to use for you
With the average retiree receiving around $1,666 per month in benefits, there is clearly a significant gap between what a typical person gets and the maximum $4,194 amount. That means that if you are of retirement age but haven't yet started collecting, there is very likely room to optimize what you will actually receive from Social Security.
Your annual earnings, the number of years you work, and the age at which you start collecting are the three factors that are the most in your control when it comes to determining your benefit level. Use them well, and Social Security could play a decent role in your total retirement income picture.
Still, with a 35-year earnings window and an eight-year collection start window involved, Social Security planning is something that takes time to do well. So get started now, and make the best use you can of this important retirement program.
