Social Security serves as a vital source of income for over 67 million older Americans, survivors, and disabled workers, with retired workers comprising approximately three-fourths of recipients. As of November 2023, the average retired worker is granted $1,845 per month, totaling $22,140 annually through Social Security.
Individuals who have earned higher salaries over their careers stand to receive considerably more than the average, especially if they opt for an early retirement. However, for those with higher earnings, delaying the commencement of Social Security benefits for as long as possible can yield surprising differences in the overall income received.
Achieving maximum Social Security benefits a quick guide
While I won’t delve into the entire Social Security formula in this brief overview (though you can refer to our comprehensive discussion for more details), the fundamental concept revolves around a formula that considers your earnings from each year you’ve been employed. Here’s a simplified breakdown:
- Inflation-Adjusted Earnings: Your earnings for each year worked in Social Security-covered employment, up to the annual Social Security taxable maximum wages, are adjusted for inflation.
- Top 35 Years Averaged: The highest 35 inflation-adjusted years are averaged together. For those with less than 35 years of work, zeros are factored into the formula for the missing years.
- Average Indexed Monthly Earnings (AIME): This average is divided by 12 to calculate your Average Indexed Monthly Earnings.
- Benefit Determination: Your AIME is then applied to a formula that determines your initial Social Security benefit.
To maximize the Social Security formula, it’s essential to earn more than the annual Social Security taxable maximum (commonly known as the “wage base”) in at least 35 separate calendar years.
The timing impact on Social Security benefits
While reaching the maximum in the Social Security formula requires a high income over at least 35 different years, the age at which you choose to claim benefits plays a crucial role. Specifically, the Social Security formula calculates your initial benefit based on retirement at your full retirement age. For individuals born in 1960 or later, the full retirement age is 67. However, you have the flexibility to start collecting Social Security as early as age 62 or as late as age 67, providing an eight-year window for initiating monthly payments.
At full retirement age in 2023, the maximum possible Social Security benefit is $3,627 per month. Opting for early retirement at age 62, the maximum possible benefit decreases to $2,572 per month — a difference of $12,660 annually.
Conversely, if you maximize the Social Security benefit formula and choose to delay benefits until age 70, the maximum jumps to $4,555 per month or nearly $55,000 per year. This translates to an additional $1,983 per month compared to a high earner opting for early Social Security at age 62. The timing of your claim can significantly impact the ultimate size of your Social Security benefits.
Consider that, due to cost-of-living adjustments, the figures for 2024 are on the rise. In the upcoming year:
- The maximum Social Security benefit at age 62 will be $2,710 per month ($32,520 per year).
- At age 67, the maximum benefit increases to $3,911 per month ($46,932 per year).
- Moreover, the maximum possible benefit at age 70 is set to increase to $4,873 per month in 2024 ($58,476 per year).
Certainly, not everyone consistently maximizes their Social Security taxable income each year. In a given year, only around 6% of workers exceed the taxable maximum, and even fewer reach this income level for 35 separate years. Additionally, waiting until age 70 to commence benefit collection may not be feasible or necessary for everyone.
Nevertheless, the essential takeaway is to prompt reflection on the two primary factors influencing your Social Security benefit. This awareness empowers you to make informed decisions in your retirement income planning. Notably, seemingly minor adjustments can yield significant outcomes. For instance, opting to claim Social Security at age 68 rather than 67 could result in approximately $1,770 in additional inflation-protected retirement income per year indefinitely.