How Will Your Social Security Stack Up to the $4,194 Max? | Smart Change: Personal Finance


(Matthew Frankel, CFP®)

In order to get the maximum possible Social Security benefit, there are a few things that need to happen. You need to work for at least 35 years in Social Security-covered employment. You need to earn more than the taxable maximum during all 35 of your highest years. In 2022, the taxable maximum is $147,000, just to put this in context. And you need to wait until age 70 to start collecting your benefit.

If all three of these things aren’t true, you won’t be receiving the maximum possible Social Security benefit.

If you aren’t getting the maximum, don’t worry. Most retirees don’t. The most common ages for claiming Social Security are 62 and 65, and while many people are high earners at some point in their careers, few max out Social Security every year. In fact, the average Social Security retirement benefit is $1,657 per month, far below the maximum possible.

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How your Social Security benefit is determined

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The Social Security benefit formula isn’t a terribly complex one. Here’s a rundown of how the process works:

  • The Social Security Administration keeps track of your Social Security taxable wages for every year of your working lifetime. You can view your earnings history on your latest Social Security statement.
  • Each year’s earnings are indexed to account for inflation. As an example, $50,000 earned in 2000 is considered to be about $86,500 in 2022 dollars.
  • The highest 35 years of earnings are averaged together, with zeros being used if you worked for fewer than 35 years. This average is divided by 12 to calculate your average indexed monthly earnings (AIME).
  • Your AIME is applied to a formula to determine your primary insurance amount, or PIA. This is what your Social Security benefit would be if you claim it at full retirement age.

For people claiming Social Security in 2022, here’s the formula that is applied to your average monthly earnings:

  • 90% of the first $1,024 of averaged indexed monthly earnings
  • 32% of earnings over $1,024 but less than $6,172
  • 15% of earnings over $6,172

When will you claim benefits?

Even if you are a high earner throughout your entire career, that isn’t enough to max out Social Security — you’ll need to wait as long as possible to claim your benefits. Eligible workers can choose to start their benefits as early as 62 or as late as 70, and full retirement age can be from 66 to 67 years old, depending on what year you were born. In fact, the highest possible Social Security benefit for someone at full retirement age in 2022 is $3,345 per month, well below the $4,194 max.

Here’s why. If you choose to start your benefits before reaching full retirement age, they will be permanently reduced. For someone whose full retirement age is 67 and who claims Social Security at 62, this reduction is a massive 30%.

On the other hand, if you wait until after your full retirement age, your benefit will be permanently increased by 8% per year until as late as age 70. For example, if your full retirement age is 67 and you wait until 69 to start, you’ll get a 16% raise over what your benefit would have been.

An example of how a Social Security benefit is determined

As an example, let’s say that your average indexed annual earnings throughout your 35 highest-earning years is $75,000, which translates to $6,250 monthly. Based on the 2022 formula for calculating PIA, your benefit at full retirement age would be:

  • 90% of $1,024 = $921.60
  • 32% of the next $5,148 = $1,647.36
  • 15% of the next $78 = $11.70

Adding these three components together gives a monthly benefit of $2,580.66 if you retire at full retirement age. If your full retirement age is 67, waiting until 68 would increase your benefit to $2,787.11. If you can hold out until age 70, you’d start collecting $3,200 in monthly installments, plus any cost-of-living adjustments made to the Social Security program between now and then.

Now that you know how the Social Security benefit formula works, you’ll be in a great position to maximize yours. You might not get the maximum possible, but you can make decisions that could lead to a higher inflation-protected stream of retirement income for as long as you live.

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