It's estimated that only about 40% of your pre-retirement earnings will be replaced
by Social Security benefits. In 2021, the average recipient will receive $1,543 per month
while the highest-paid recipient will get $3,895.
How big your payment is plays a big role in just how much of your expenses Social Security will cover in retirement. And maximizing your benefit will greatly depend on these three factors.
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1. Working 35 years or more
Your Social Security payments are calculated by using the average indexed monthly earnings
(AIME) of your highest 35 wage-earning years, up to a cap
. If you haven't worked 35 years, the ones that you didn't earn any income will count as zeros. For example, if you worked 20 of the 35 years, your 20 years of wages will be added up along with 15 zeros, and the average will be taken for the 35 years.
If you work for exactly 35 years, then all of your years of earning money will count, and this will ensure that you don't have any zeros that can drag your payment down. Spend more than 35 years in the workforce, and your lowest wage-earning years will be excluded from this calculation, which should bring your average up. So if you started work at 22 and stopped at 62, only the 35 highest-paid years of your 40-year work history will go into your Social Security payment calculations.
2. Starting benefits at age 70
Depending on the year you were born, your full retirement age
is either 66, 67, or somewhere in between. You receive your standard benefit
if you work until this age, but you can take your benefits earlier or later than this. If you take them before, they will be reduced
for every month that you take them early. Your benefits will increase
for every month that you delay them up to age 70.
Imagine that your standard monthly retirement benefit at age 66 is $2,000, your reduced benefit at age 62 is $1,400 each month and your increased benefit at age 70 is $2,640 per month. If you live to be 75, you will receive $218,400 in total income if you start benefits at age 62, $216,000 if you start at 66, and $158,400 if you start at 70. But live until 85, and you'll receive $386,400 if you start at 62, $456,000 at 66, and $475,200 if you start at 70.
So waiting until age 70 will ensure that you receive the highest possible monthly payment, but it may not yield the highest amount of lifetime income. If you think you could live a long life, delaying your benefits to this age could work in your favor. But if you don't have a history of longevity in your family, taking them earlier may be your best move.
3. Maxing out your earnings
Every year, a wage base limit
is calculated, which determines the maximum amount you will pay in Social Security tax
. This number gets adjusted upward every year to account for annual changes in wage growth. In 2021, the wage base limit is $142,800, a $5,100 increase from 2020. If you earn this much or higher, you also max out your earnings for your own Social Security benefit calculations.
Those who earn the wage base limit
or above for at least 35 years will receive the highest possible Social Security benefit. For highly paid workers, this will be easier for achieve. But even if you can't reach the limit, earning a higher income each year with regular pay raises or part-time work can still increase your overall average, which will help you get a higher monthly payment.