A large part of having a stressless retirement is ensuring your finances are in order. A good financial plan can go a long way in ensuring you can enjoy the retirement you envision. Having a solid financial plan for retirement typically involves knowing the role Social Security will play in your finances. It may be very little, some, most, or all.
In 2023, the maximum monthly Social Security benefit is $4,555. Unfortunately, most people won't receive the maximum benefit, but here's how you could possibly accomplish it.
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How your monthly Social Security benefits are calculated
Social Security calculates your monthly benefit by taking a percentage of your average income during the 35 years when your income was highest. However, not all income is considered. Only income up to a certain amount (called the wage base limit) is taxed each year and counted in the calculation.
The wage base limit is an annual limit on how much of your income is taxed and used in Social Security calculations. The wage base limit in 2023 is $160,200, so no amount earned above that is considered for your monthly benefit.
In order for you to receive the maximum $4,555 monthly benefit, your average income must be the highest possible during the 35 years used in the calculations. This means your income must be equal to or greater than the wage base limit for each of those 35 years. For instance, if 2023 will be one of the 35 years included when calculating your Social Security benefit, you'll need to earn at least $160,200 to have a chance to receive the maximum $4,555 payout.
Since the wage base limit is adjusted for inflation each year, you must earn the inflation-adjusted equivalent of $160,200 for at least 35 years to qualify. If 2022 will be one of the years used in your calculations, you would have needed to earn $147,000 last year.
It's about more than just earnings
Your full retirement age (FRA) plays a large part in your monthly Social Security benefit as well. It's based on your birth year as follows:
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Your FRA is important, because it's the baseline that determines your monthly benefits if you claim them early (as early as 62) or delay them (up until you turn 70). Claiming benefits early will reduce them according to how far away you are from your full retirement age. For example, if your FRA is 67 and you claim benefits at 62, they'll be reduced by 30%.
Delaying your benefits past your full retirement age will increase them by two-thirds of 1% monthly (8% yearly) until you're 70. You can keep delaying after 70, but the benefit won't increase any further, so there's no real need to.
To receive the maximum $4,555 benefit, you must meet the minimum income requirements and delay benefits until you reach 70. If you met the income requirements and took benefits at your full retirement age, the maximum payout would be $3,627. If you took benefits early at 62, the maximum payout would be $2,572.
How to get an idea of how much your benefits will be
You should check your earnings record to get an idea of your Social Security benefit. To do this, create an account on the Social Security website (SSA.gov). Once your account is created, you should be able to find a record of all your annual earnings and projected monthly benefits based on when you plan to claim (early, at FRA, or late).
The projected benefit for an overwhelming majority of people is well below the $4,555 maximum. According to Social Security, only around 6% of people have income above the wage base limit each year, so the number of people earning at least that much for 35 total years is far less. Only around 20% of people are projected to earn over the wage base limit in at least one year.
Don't feel disheartened if you are currently ineligible for the maximum benefit. Instead, use it as a chance to reinforce the need to save and invest properly over time, so Social Security can serve as supplemental income in retirement instead of your main source.
