In 2022, some seniors will receive a monthly Social Security benefit of $4,194, the maximum available. But not much. According to the Social Security Administration, the average monthly benefit for retirees will be $1,623 in 2022.
The maximum Social Security benefit may sound like a huge amount, but even if you get that much, chances are it’s not nearly enough to make ends meet.
$4,194 a month isn’t as generous as it sounds
The harsh reality about Social Security benefits is that they are intended to replace only about 40% of pre-retirement income. And for some people, they replace a much smaller percentage.
Your benefit is calculated on the basis of the average wage in the 35 years that your wage was highest (after adjustment for inflation). To qualify for a $4,194 Social Security check, you must have earned the maximum income subject to Social Security tax for a period of at least 35 years. And then you would have had to wait until age 70 to maximize deferred retirement loans.
Each year, the Social Security Administration (SSA) sets the maximum taxable income, the wage base limit. In 2022 it will be $147,000. The SSA regularly adjusts the inflation limit, but as you can see, it is relatively high. If you earned less than the wage base limit in any of the 35 years that count in your formula, you are not eligible for a benefit of $4,194. If you earned more than the wage base limit in any given year, those wages will not compensate for years in which you did not reach the limit.
If you’re used to making the inflation-adjusted equivalent of $147,000 or more for 35 years, a sudden drop to $50,328 a year (the equivalent of $4,194 a month) would be a huge pay cut. You probably wouldn’t want to lower your standard of living that much, so the maximum benefit wouldn’t be enough, even if it’s much more than most seniors get (the average monthly benefit is $1,669).
Everyone needs savings to supplement social security
Understanding how much you should earn to maximize your Social Security checks is helpful for a few reasons.
First, it underscores the fact that most people will receive far less than the maximum benefit. Unless you earn the inflation-adjusted equivalent of $147,000 for 35 years and claim Social Security at 70 to max out your deferred retirement credits, that maximum benefit is a fantasy to you.
And the wider the gap between your earnings and $147,000, the smaller your retirement check will be relative to the maximum. Most people can expect to get closer to the average benefit, clearly not enough to live on without extra money coming in.
Second, it shows that even when a Social Security benefit sounds big, any retiree who tries to depend on it will face a massive pay cut. You cannot live on 40% or less of what you once made. So be sure to start saving and investing throughout your career — with tax-advantaged accounts like a 401(k) and IRA — so you don’t have to try.