Maximizing Social Security
According to the Social Security Administration (SSA) the maximum monthly Social Security benefit that an individual who files a claim for Social Security retirement benefits in 2020 can receive per month is:
- $3,790 for someone who files at age 70
- $3,011 for someone who files at full retirement age (FRA)
- $2,265 for someone who files at 62
- Qualifying for Social Security at age 62 requires 10 years of work or 40 work credits.
- The maximum monthly Social Security benefit that an individual can receive per month in 2020 is $3,790 for someone who files at age 70.
- For someone at full retirement age the maximum amount is $3,011, and for someone aged 62 the maximum amount is $2,265.
How Social Security Works
To qualify for Social Security in the first place requires 40 work credits or approximately 10 years of work. If you have 40 work credits, you are eligible to claim Social Security once you reach age 62. The full retirement age, however, depends on the year of your birth. For example, if you were born in 1960 or later your FRA is 67; if you were born between 1943 and 1954, it is 66. You can only receive 100% of your benefits if you wait until your FRA to claim. If you claim earlier, you will receive less—and if you claim after age 70, you receive an 8% bonus for each year that you delayed claiming.
Social Security benefits are calculated by combining your 35 highest-paid years (if you worked for more than 35 years). First, all wages are indexed to account for inflation. Wages from previous years are multiplied by a factor based on the years in which each salary was earned and the year in which the claimant reaches age 60. This calculation gives an amount comparable in buying power based on the current value of the dollar. Accounting for this valuation change is important, because a salary of $14,000 was far more impressive in 1954 than it is today.
Once all wages have been indexed, the Average Indexed Monthly Earnings, or AIME, is computed by dividing the sum of all indexed wages by 420 (35 years expressed as months—months when you didn't work, if you worked fewer than 35 years, are figured in as zeros). The benefit amount is then calculated based on factors like the year in which collection begins, whether the claimant has reached full retirement age, and whether the claimant continues to work while collecting benefits.
Social Security is designed to replace approximately 40% of your pre-retirement income.
Say that someone who turns 62 in 2020 will reach full retirement age at 66 years and eight months, with earnings that make them eligible at that point for a monthly benefit of $1,000. Opting to receive benefits at age 62 will reduce their monthly benefit 27.5% to $725 to account for the longer time they could receive benefits, according to the Social Security Administration. That decrease is usually permanent.
Waiting Until Age 70
If that same individual waits to get benefits until age 70, the monthly benefit increases to $1,280. The larger amount is due to the delayed retirement credits earned for the decision to postpone receiving benefits past full retirement age. In this example, that higher the amount at age 70 is about 76% more than the benefit they would receive each month if benefits started at age 62, or a difference of $555 each month.
A Social Security Administration calculator can give you more personalized information.
Marguerita M. Cheng, CFP®, CRPC®, RICP, CDFA
Blue Ocean Global Wealth, Gaithersburg, Md.
According to the Social Security Administration (SSA), the maximum benefit paid at full retirement age (FRA) in 2019 is $2,861. Bear in mind that this is the maximum benefit at FRA, but you can defer your benefits and increase your Social Security benefit. Here are some examples:
- Julia Child retires and delays claiming benefits two years beyond her FRA. She will receive a monthly benefit 16% larger than her primary insurance amount (PIA): 2/3 x 24 = 16%. By deferring her benefits, Julia permanently increased her $1,400 FRA benefit to $1,624.
- James Brown retires and delays claiming benefits four years beyond his FRA. He will receive a monthly benefit 32% larger than his PIA: 2/3 x 48 = 32%. By deferring his benefits, James permanently increased his $1,600 FRA benefit to $2,112.