If you’re planning your retirement, you might be wondering what the maximum Social Security benefit is.
When preparing for retirement, most people are closely focused on the performance and projections for their retirement investment accounts. But equally important is having an approximate estimate of benefits from Social Security—another crucial leg of the retirement planning platform.
One important factor is that Social Security benefits are based solely on income earned during your working years, not on the size of your asset base, as is the case with 401ks, IRAs and other defined contribution plans. This is especially important now that we’re in a time of very low single digit returns on safe investments, like CDs and Treasury securities—the very type of low-risk investment vehicles that traditionally represent the bulk of retirees’ portfolios.
How much you can earn from Social Security will depend entirely on personal circumstances such as your age at retirement and the amount of income you’ve earned over your working life. But while we can’t come up with a rule of thumb estimate that will work in all (or even most) cases, it helps to start with the maximum benefit because it’s a number that will apply for most people.
Calculating the Maximum Social Security Benefit
The maximum monthly benefit a retiree can earn depends on when he or she retires. For a worker retiring at age 66—the current age of “normal retirement”—the maximum monthly benefit is $2,366. (This number will be higher if the commencement of benefits is delayed until age 70.) How is that calculated?
The Social Security Administration has a record of covered earnings (the maximum amount of earnings subject to FICA tax) going back to when you were 21 years old. They take an average of the best 35 years during your working life and discard the others.
In tracking earnings going back decades, inflation is a factor, and the Administration takes this into account. They use an “indexing factor,” which is a multiplier that adjusts the amount of earnings in each year in order to put previous years in line with current price levels. The earnings in each year are multiplied by the index factor for that year, and the results of the 35 best years are totaled up and divided by the number of months (420) in the 35-year period. This produces what’s known as the Average Indexed Monthly Earnings, or AIME.
Your benefit will then be calculated based on a percentage of your AIME. The percentage applied is based on an algorithm used by Social Security that takes a number of factors into consideration, including age and income levels.
Are we done yet? Not quite!
The monthly benefit will then be adjusted for age of retirement. If your normal retirement age is 66 but you elect to begin receiving benefits before that (but no earlier than age 62), your benefit will be reduced by approximately 4/10 of 1% for each month that your retirement precedes your normal retirement age. Thus if your normal retirement age is 66 but you elect to begin receiving benefits at age 62, your monthly benefit will be reduced by 25%.
Conversely, your benefit will be increased—by an amount equal to 2/3 of 1% for each month following the attainment of normal retirement age—if the start of benefits is delayed past your normal retirement age, up until age 70. If you delay taking retirement until age 70, your monthly benefit will be 32% higher than it would be at your normal retirement age of 66.
Maximum Social Security Spousal Benefits
If your spouse is qualifying based on your earnings record, he or she will receive 50% of your monthly benefit. The maximum spousal benefit then for your spouse at age 66 (primary spouse retired, also age 66), would then be $1,183 per month.
A spouse can qualify either under a spousal benefit, or based on his or her own earnings record. Social Security will pay spousal benefits based on the spouse’s record first, but if the benefit as a spouse is higher than the spouse’s retirement benefit, the spouse will receive a combination of benefits equaling the higher spouse’s benefits.
The Minimum Social Security Benefit
In case you’re wondering, per the Social Security Administration, there is no official minimum monthly Social Security benefit amount. However, there is what’s called the “Special Minimum Benefit,” which the Administration describes as follows:
We pay “special minimum” benefits to certain individuals who’ve had long periods of relatively low earnings. To qualify for such benefits, a person must have at least 11 “years of coverage”. To earn a year of coverage, a person must earn at least a certain proportion (25 percent for years before 1991, and 15 percent for years after 1990) of the “old-law” contribution and benefit base.
The special minimum benefit ranges from $36.90 per month if you’ve paid in for at least 11 years, to as much as $763.20 if you’ve paid in for at least 30 years.
If you’d like to calculate a reasonable estimate of your Social Security benefits, you can do so at the agency’s website.