If you’re retiring and you qualify for Social Security‘s maximum benefit, you could pocket $3,895 per month in Social Security income in 2021. You’ll only collect that much money if you begin receiving benefits at 70 years or older, though. The maximum amount you can collect this year if you file at age 62 is $2,324, and the maximum paid if you’re 66 is $3,113.
However, you should know Social Security’s formula is complex and collecting the maximum benefit depends on many things, including the length of your work history. Here’s how Social Security calculates maximum benefits and what you can do to get the biggest possible payout.
How Social Security calculates benefits
Social Security benefits are based upon how many years you work, the amount of money subject to payroll taxes you earned over your career, and when you first start receiving benefits.
You can start collecting benefits as young as age 62, but you’ll only receive 100% of your benefit amount if you claim Social Security at full retirement age, which ranges from age 66 to age 67 for people born after 1943. If you claim earlier than full retirement age, your benefit amount is reduced. If you claim later than full retirement age, your benefit is increased because of delayed retirement credits.
To determine if you qualify for Social Security’s maximum benefit, Social Security adjusts your historical annual income for inflation and then calculates your average monthly income based upon your highest 35 earning years. If you don’t have 35 years of income, zeros are included in the formula for those years, reducing your benefit and ensuring you won’t qualify for the maximum possible amount.
Once Social Security has calculated your average monthly income, it reduces that amount at specific income levels called bend points to determine your primary insurance amount, or the benefit you’ll receive if you claim at full retirement age.
As I mentioned, if you claim earlier than full retirement age, then your primary insurance amount is reduced. Specifically, it’s lowered by five-ninths of 1% per month for the first 36 months you claim early and by five-twelfths of 1% for every additional month you claim early. Alternatively, if you delay claiming benefits until after full retirement age, your benefit is increased by two-thirds of 1% for every month you delay, up to age 70, because of delayed retirement credits. This is why the maximum benefit payable varies depending on how old you are when you first file for Social Security.
How to maximize your Social Security
Social Security’s formula makes qualifying for the maximum benefit tough. Not only will you need to have a 35-year work history, you’ll also need to have earned income at or above the annual taxable limit in all of those years. That’s no easy feat given the average American worker is earning about $51,000 per year, yet the maximum taxable limit for Social Security is $142,800 in 2021.
Nevertheless, there are strategies you can use to make sure you get the biggest benefit possible even if you don’t qualify for the maximum Social Security amount.
For example, working at least 35 years eliminates zeros in your average monthly income calculation and delaying retirement may allow you to replace lower income earning years from the beginning of your career with higher earning years later in life, boosting your benefit, too.
You can also wait until age 70 to start receiving benefits to capture increases associated with delayed retirement credits. The difference between claiming benefits at age 62 and age 70 is substantial. For example, if your full retirement age is 67 and your full retirement benefit is $1,000, then you’d only receive 70% of your full retirement age benefit, or $700 per month, if you claim at age 62. However, if you wait to claim until age 70, you’d receive 124% of your full retirement benefit amount, or $1,240 per month. That’s 77% more money than you’d collect at age 62.
A final thought
Because qualifying for the maximum Social Security benefit is so hard, the amount you’re entitled to may fall short of your retirement goals. Consider this point: The average retired worker is collecting just $1,554 in benefits in 2021, or about $18,644 per year. That’s not chump change, but it’s probably not going to allow you to live a life of luxury, making it important to consider Social Security planning strategies.