In 2021, the maximum Social Security benefit for full retirees will be $ 3,148 monthly. That adds up to $ 37,776 annually – not enough for world travel, but still a healthy addition to the distributions you’ll take from your retirement account. Here’s a look at how to qualify for that maximum benefit.
Social Security Calculator
You certainly did not wake up this morning with a deep desire to learn how Social Security benefits are calculated. But a quick look at the formula will provide the context for how to start retiring in 2021 with Social Security income plus $ 37,000.
Your benefits are based on the median of your past earnings. However, the average is not as simple as adding up your previous wages and dividing by the number of years. First, Social Security adjusts your income for inflation. Your adjusted gross income from your top 35 paid years is then summed, with two notes:
- There is a limit to the income considered in the formula, corresponding to the salary limit for each year. For example, in 2021, the maximum allowable income is $ 142,800.
- If you haven’t earned Social Security wages for the full 35 years, any outstanding years count towards the average as zero.
Then, the total is divided by 420, which represents the number of months in 35 years. That brings you to the average of your earnings, officially known as Average Monthly Indexed Earnings (AIME).
Your AIME is then combined with Social Security’s main insurance amount (PIA) formula to calculate your benefits. The PIA formula is decentralized and works as follows:
- Multiply AIME’s first $ 996 by 90%.
- Multiply AIME above $ 996 and to $ 6,002 by 32%.
- Multiply AIME above $ 6,002 by 15%.
- Add them up and round down to the nearest multiple of $ 0.10. That amount is your Social Security benefit when you reach full retirement age (FRA).
Note that the wages for each tier, called the inflection point, change each year. You must follow the established curvature points for the year you are eligible for Social Security.
Running through that formula with AIME of $ 4,200 (roughly the median annual salary of $ 50,000) gives you an resulting benefit of around $ 1,921 monthly – far below the $ 3,148 maximum la.
Taxable income maximum
At this point, it is clear that you have to make more than $ 50,000 annually to get the most out of your 2021. Specifically, you need to maximize your AIME. That means you have earned maximum taxable income for 35 years or more. As noted, the income cap for 2021 is $ 142,800 – but it has risen significantly over the past few decades due to inflation. For example, it was $ 39,600 in 1985, $ 76,200 in 2000, and $ 106,800 in 2010.
The second requirement to secure a $ 3,148 monthly benefit is that you must meet your FRA. Early claims reduce your benefits by up to 30%.
Optimize your AIME
Since the average annual salary in the US is around $ 52,000, most workers cannot get maximum Social Security benefits. Even so, you can still make moves that get you closer to that elite Social Security benchmark.
First step, take a look at your earnings history today. You can find it on your Social Security statement or by logging into My Social Security online. Estimate the number of years you will earn your Social Security wages since your scheduled retirement date. If you are under 35 years old, consider delaying your Social Security application. Each year you continue to work will replace your average no-income year, which will increase your AIME.
If you’ve worked for 35 years or more, you still have a chance to replace lower-income years with higher-income years. It can happen naturally by continuing to work if you have recently increased your income. You can also get a promotion at work or take a second job.
Delaying your claim after FRA also increases your benefits in another way. You’ll be eligible for deferred retirement credits, which can increase your Social Security income by up to 8% per year.
Ensure your social security
You may not get the highest Social Security benefits available – very few people. However, any increase in income during your working years can push your retirement benefits even higher. Asking for a raise in the workplace, getting a second job or starting a side job are all strategies to consider. Given that Social Security income will continue for the rest of your life, the cumulative financial impact of a higher starting benefit could be significant.