Do you count on the maximum social security benefit? You may want to reconsider | Smart Change: Personal Finance
Do you count on the maximum social security benefit?  You may want to reconsider |  Smart Change: Personal Finance

Do you count on the maximum social security benefit? You may want to reconsider | Smart Change: Personal Finance

(Stefon Walters)

For many people, social security will play a significant role in their retirement income. For decades, Americans pay social security taxes and plan to receive monthly payments in retirement that will be either their primary income or supplemental income to other means, such as a 401 (k) plan.

Depending on factors such as lifestyle and location, maximum Social Security benefit may be enough for some to survive solely on. But if you are planning to receive the maximum pension benefits from social security, you can think twice.

Image Source: Getty Images.

How to calculate social benefits

Social security defines the primary insurance amount (PIA) as the amount a person would receive if they start receiving benefits at their full retirement age (before rounding it down to the nearest whole dollar). Depending on the year you were born, your full retirement age is calculated this way.

People also read …

Year of birth Full retirement age
1943 to 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Data source: Social Security Administration.

Social security calculates your pension benefits by:

  1. Finding Out Your Lifetime Earnings.
  2. Adjustment of earnings to take into account changes in the average salary since the year you received the income.
  3. Calculating your average adjusted monthly earnings over the 35 years you earned the most.
  4. Apply a formula on earnings to get your PIA.

The maximum benefit someone can receive depends on the age at which they retire. If you retire at your full retirement age in 2022, the maximum monthly benefit is $ 3,345. If you retire at age 62 in 2022, the maximum benefit is $ 2,364. And if you defer your benefits to $ 70, your maximum benefit will increase to $ 4,194.

Unfortunately, it is unlikely that you will qualify for full retirement benefit from Social Security. By March 2022, more than 47.6 million people are receiving benefits, and the average monthly benefit is just over $ 1,665 – less than half the maximum allowable benefit.

What happens when you retire early?

Another reason why people may not only receive the maximum social security benefit, but also the maximum benefit to which they are entitled, is due to early retirement. You can start receiving social benefits at the age of 62, but you will not receive your full benefits until you reach what social security defines as your full retirement age.

Benefits are reduced by five-ninths of 1% for each month before your full retirement age, up to 36 months. If you retire more than 36 months before your full retirement age, months in excess of 36 will be further reduced by five twelfths of 1% each month.

If you retire at age 62, here you can see how much you can expect your benefits to be reduced when you reach your full retirement age.

Year of birth Months to full retirement age Reduction of benefits
1943 to 1954 48 25%
1955 50 25.83%
1956 52 26.67%
1957 54 27.50%
1958 56 28.33%
1959 58 29.17%
1960 or later 60 30%

Data source: Social Security Administration.

Use the various pension accounts available

Many people have to rely on more than one remedy to live the life they imagine when they retire – and that’s all right; that’s what they’re for. One of the best ways to ensure that you are financially secure by retiring is to take advantage of the various retirement accounts available to you.

If your job offers a 401 (k) plan, be sure to take advantage of it (especially if there is an employer match). But it would help if you also researched using other accounts, such as one Roth IRA or traditional IRA. The tax benefits of these accounts can not only pay off in the short term, but you will thank yourself later and be glad you used them in retirement.

The $ 18,984 Social Security bonus completely overlooks most retirees

If you are like most Americans, you are a few years (or more) behind with your retirement savings. But a handful of little-known “social security secrets” could help secure a boost in your retirement income. For example: one easy trick could pay you as much as $ 18,984 more … every year! Once you’ve learned how to maximize your social security benefits, we think you can safely retire with the peace of mind we all seek. Just click here to find out how you can learn more about these strategies.

The Motley Fool has one information policy.

Leave a Reply

Your email address will not be published.