Are you on track for the maximum Social Security benefit of $ 3,895?
A few lucky retirees are collecting nearly $ 47,000 in Social Security benefits this year, not to mention the spousal or family benefits to which their loved ones are entitled. Having that kind of guaranteed income would make retirement a lot easier for most people, but figuring out how to get there is another story.
The answer is both simpler and more complex than you might imagine. Below, we’ll take a look at exactly what it takes to rake in the maximum monthly Social Security benefit of $ 3,895.
How to get the most out of Social Security benefits, step by step
Here is a brief description of the steps followed by the Social Security Administration to calculate your benefit:
Step 1: Find your LIKE
The first step is to calculate your indexed average monthly income (AIME). This is your average monthly income over your top 35 earning years, with adjustments for inflation. For example, if you earn $ 50,000 per year, adjusted for inflation, every year for 35 years, you would calculate your AIME like this:
($ 50,000 x 35 years) / 420 (the number of months in 35 years) = $ 4,167 AIME
Those who have not worked for at least 35 years have years of zero income factored into their calculation, which reduces their benefit. Those who work over 35, on the other hand, see their lower paid years replaced by higher paid years, resulting in a higher benefit.
In most cases, your annual income and the amount you pay Social Security taxes on are the same, but higher earners are not. In 2021, you only pay these taxes on the first $ 142,800 you earn. This limit was lower in previous years.
So, if you want to earn maximum Social Security benefits, you need to earn the equivalent of at least $ 142,800 in 2021 dollars over 35 different years. Not an easy task for most people.
Step 2: Apply the Social Security benefit formula
Once the Social Security administration has your AIME, it plugs it into the applicable Social Security benefit formula. Here is the formula for 2021:
- Multiply the first $ 996 of your AIME by 90%.
- Multiply any amount between $ 996 and $ 6,002 by 32%.
- Multiply any amount greater than $ 6,002 by 15%.
- Total your results from Steps 1 through 3 and round down to $ 0.10.
In this example, $ 996 and $ 6,002 are called bend points. These change each year to account for inflation, and this is what distinguishes one benefit formula from another. The formula the Social Security Administration uses to calculate your benefits is for the year you turned 62. This is true even if you do not claim benefits until much later.
The result of this step is known as the Principal Amount of Insurance (MPR). Going back to our example of an AIME of $ 4,167 from the step above, we would end up with a PIA of $ 1,911 if we used the benefit formula above.
This is the amount you would receive if you subscribed to Social Security at full retirement age (FRA). Your ARF is 66 if you were born between 1943 and 1954. Then it increases by two months each year thereafter until reaching 67 for people born in 1960 or later.
You don’t have to register directly with your FRA if you don’t want to, but if you don’t, Social Security does another calculation which determines how much you receive per month.
Step 3: Adjust the amount of your benefits according to your retirement age
Joining social security before your FRA reduces your checks. You lose 5/9 of 1% per month if you claim up to 36 months before your FRA. Those who claim more than 36 months before their FRA lose an additional 5/12 of 1% per month. This means that those who enroll immediately at 62 only get 70% of their PIA if their FRA is 67 or 75% if their FRA is 66.
Deferring benefits beyond your FRA is also an option. In this case, your checks increase by 2/3 of 1% for each month you wait until you reach your maximum benefit at 70. This is 132% of your PIA if your FRA is 66, or 124 % if your FRA is 67.
So if you have a PIA of $ 1,911 and an FRA of $ 67, you will only get about $ 1,338 per month if you sign up immediately at 62. But you could get as much as $ 2,370 a month if you waited until 70.
If you want the biggest Social Security benefit possible, you need to defer benefits until age 70, when you are entitled to your biggest checks. Seniors with large pips and good health can afford to do this, but those with little savings or serious health issues are often better off enrolling early, even if it means getting less benefit from the program. .
How to get your biggest social security benefit
While we would all like to receive $ 3,895 from the government each month, most people won’t. It takes extremely high income and the patience to delay benefits until age 70. But that doesn’t mean the discussion we’ve had so far is pointless.
You can still use the tips we covered above to get the most Social Security benefit possible. Do your best to:
- Work at least 35 years.
- Increase your income as much as you can during your working years.
- Delay benefits if you think it makes sense to you.
Taking these steps will help you qualify for your biggest Social Security benefit, and it will ease the strain on your personal savings in retirement.