Could you retire on $750,000? That's how much some of the richest retirees have handed to them in Social Security benefits over their lifetimes. Even if you plan for a more luxurious retirement, there's no doubt that kind of cash could go a long way toward paying for it.
Claiming that kind of benefit is actually pretty simple — note I said simple, not easy. Here's what you have to do to make it happen.
1. You have to achieve the maximum average indexed monthly earnings (AIME)
The first step the government takes in determining your Social Security benefit is to calculate your average indexed monthly earnings (AIME). It's your total income over your 35 highest-earning years, with adjustments made for inflation, divided by 420 — the number of months in 35 years. For example, if you earned $50,000, adjusted for inflation, every year for 35 years, your AIME would be $4,167.
It's possible to claim Social Security benefits as long as you've worked at least 10 years, but if you want the largest possible benefit, you need to work at least 35 years. Otherwise, you'll have zero-income years included in the calculation, and that'll sink your benefit fast.
To get the largest possible AIME, you have to earn the equivalent of $142,800 in 2021 dollars or more in each of your 35 highest-earning years. Money over this amount won't increase your benefit because you don't pay Social Security taxes on it. This limit increases slightly every year to account for inflation.
Earning that much is a challenge for a lot of people, and only an elite few will likely achieve it. But that doesn't mean you'll get a pittance if you're not pulling in six figures. The Social Security benefit formula divides your AIME into three tiers and multiplies each tier by 90%, 32%, or 15%, then totals the results from each step. In 2021, the tiers are as follows:
90% tier: $0 to $996
32% tier: $996 to $6,002
15% tier: $6,002 and up
So if your AIME was $4,167, your benefit based on this formula would be $1,911 per month. You'd multiply the first $996 by 90% to get $896 and the remaining $3,171 by 32% to get $1,015. Then, you add them together to get $1,911.
Because of how it's set up, people see their benefits increase more slowly in the higher tiers while low-income individuals receive a benefit that's closer to their AIME.
2. You have to delay benefits until 70
The above formula shows an example of how to calculate benefits at your full retirement age (FRA). That's between 66 and 67, depending on your birth year. But that's only part of the story. You can sign up at any point after 62, but starting before your FRA will reduce your benefit. You'll only get 70% of your full benefit per check if you sign up at 62 and your FRA is 67. Those with a FRA of 66 get 75% of their full benefit per check if they sign up right away.
Delaying benefits, on the other hand, increases your checks until you reach your maximum benefit at 70. That's 124% of your full benefit if your FRA is 67 or 132% if your FRA is 66.
In 2021, the largest possible Social Security check is $3,895 per month. This is only available to those who have achieved the maximum AIME and delayed benefits until 70. However, this isn't always possible or wise.
Some retirees cannot afford to cover their expenses without Social Security and must start early to make ends meet. Others may not live to see 70 or they may get more money overall by starting early if they have a terminal illness.
But even if you can't afford to delay benefits until 70, you might still be able to increase your benefits slightly by delaying benefits for a month or two. Every little bit helps and will result in a permanent increase to the size of your checks.
3. You have to live until you're at least 86
If you claimed the maximum benefit of $3,895 starting at 70, you'd have to live until you were about 86 and 1 month in order to receive $750,000 in lifetime Social Security benefits. This does not include any cost-of-living adjustments (COLAs).
This is close to the average life expectancy for a 65-year-old today, according to the Social Security Administration, but again, you can never be sure you're going to make it to that. If you don't, you won't end up with as much in Social Security benefits. Conversely, if you live longer, you could end up with a lot more. There's no way to be certain.
While it's unlikely that most of us will ever receive $750,000 in benefits, $400,000 to $500,000 isn't out of the question for most people. That's a good chunk of change, but you might be able to do even better if you follow some of the tips outlined above.
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