Most retired workers depend on Social Security to some degree, and benefits tend to become an increasingly important source of income as people age. That information should motivate current workers to do what they can to maximize their future Social Security payments, but many people aren't sure what that means.
In a recent survey from Nationwide Retirement Institute, only 53% of respondents said they strongly agreed or somewhat agreed with the following statement: "I know exactly how to maximize my Social Security benefits."
That knowledge gap could have serious consequences in retirement. While very few people will get the maximum Social Security benefit, understanding how to maximize benefits is still important. Workers lacking that knowledge could shortchange themselves during their golden years.
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The maximum Social Security benefit is $4,555 per month in 2023
The benefits formula is adjusted each year to account for changes in the national average wage index, a metric that tracks fluctuations in general wage levels. Wages rise over time, so the maximum Social Security benefit increases from one year to the next. The maximum retired worker benefit is currently $4,555 per month, up from $4,194 per month last year and $3,895 per month the year before last.
Workers who want the biggest Social Security benefit must follow three steps: (1) Work for at least 35 years, (2) make more money than the taxable limit during those years, and (3) claim Social Security at age 70. Here are the details.
Step 1: Work for at least 35 years
The benefits formula uses the average indexed monthly earnings (AIME) from the 35 highest-paid years of employment to calculate the primary insurance amount (PIA) for a retired worker. The PIA is the benefit they would receive if they started Social Security at full retirement age (FRA).
Therefore, workers must be employed for 35 years to get the maximum Social Security benefit. Anyone with a shorter employment history is disqualified because zeroes will be included in the AIME calculation. For instance, someone with a 30-year employment history will have five zeroes factored into their AIME.
That advice is relevant to every future beneficiary. All else being equal, someone who works for 35 years will get a larger Social Security benefit than someone who works for 30 years.
Step 2: Make more money than the taxable limit
The Social Security program is primarily funded through payroll taxes, but not all income is subject to taxation. The maximum taxable earnings limit is tethered to the national average wage index, so it increases from one year to the next. The taxable limit is currently $160,200, up from $147,000 last year and $142,800 the year before last. Any income above the taxable limit is not subject to Social Security payroll tax, nor is it included in the AIME calculation.
So, workers must make more money than the maximum taxable limit for at least 35 years in order to qualify for the maximum Social Security benefit. This is the step that will trip up most people. Just 6% of workers have earnings that exceed the taxable limit in any given year, according to the Social Security Administration.
Step 3: Start Social Security benefits at age 70
Workers are eligible for retirement benefits at age 62, but they will not get their full benefit (or PIA) unless they claim Social Security at FRA, which is age 67 for anyone born in 1960 or later. Workers who start early get a reduced portion of their PIA, and workers who start late get an increased portion of their PIA.
Specifically, workers who delay Social Security beyond FRA earn delayed retirement credits that increase their benefit by two-thirds of 1% per month, or 8% per year. Delayed retirement credits stop accumulating at age 70, meaning it never makes sense to start Social Security any later.
So, workers aiming for the maximum Social Security payout must start benefits at age 70. But that advice is applicable to every future beneficiary, whether or not they might qualify for the biggest benefit. All else being equal, someone who claims Social Security at age 70 will get a bigger benefit than someone who claims any earlier. In fact, the median worker could increase their lifetime spending power by $182,370 by following that advice, according to a recent study from the National Bureau of Economic Research.
