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How Much Do You Need to Earn to Max Out Your Social Security Benefit?

Matthew Frankel, CFP, The Motley Fool

The maximum Social Security benefit for a new retiree in 2018 is north of $33,000 per year at full retirement age and can be even higher for workers who wait. So how much do you need to earn if you want the maximum Social Security benefit when you retire?

Unfortunately, this question is more complicated than it may seem. Here's a rundown of how much you can get from Social Security, how much you'll need to have earned to get the maximum benefit, and how the maximum benefit amount could change in the future.

Social Security card inserted in money.

Image Source: Getty Images.

What is the maximum possible Social Security benefit?

The short answer is that the maximum possible Social Security benefit payable to someone retiring at their full retirement age in 2018 is $2,788 per month, which translates to $33,456 per year.

Just for reference, 66 years old is still the full retirement age in 2018. For Americans born in 1954 or earlier, the Social Security full retirement age is still 66. It will gradually transition to 67 years old for workers born in 1960 or later.

The Social Security a worker is entitled to if they claim benefits at full retirement age is known as the primary insurance amount, or PIA. This is calculated as an average of the worker's 35 highest inflation-adjusted years of earnings, applied to a benefit formula that is modified annually.

It's also worth noting that since the Social Security benefit formula changes each year, the maximum possible Social Security benefit is likely to be somewhat different in future years.

How much do you need to earn to max out Social Security?

To receive the maximum possible Social Security benefit, you'll need to earn more than the Social Security maximum taxable earnings in at least 35 individual years throughout your career.

For 2018, the maximum amount of earnings that can be taxed for Social Security is $128,400. In 2017, the taxable maximum was $127,200. Here's a quick guide to the Social Security maximum taxable earnings for the past several years, just to give you an idea of how this figure can increase over time. (Note: You can find a full historical guide in this worksheet provided by the Social Security Administration.)

Year

Maximum Taxable Earnings

Year

Maximum Taxable Earnings

2005

$90,000

2012

$110,100

2006

$94,200

2013

$113,700

2007

$97,500

2014

$117,000

2008

$102,000

2015

$118,500

2009

$106,800

2016

$118,500

2010

$106,800

2017

$127,200

2011

$106,800

2018

$128,400

Data Source: Social Security Administration.

It's also important to mention that only earned income is taxable for Social Security purposes. In other words, dividend income, interest income, capital gains, passive business income, and similar sources don't count.

For example, if your total income in 2017 was $150,000, but $50,000 of this amount came from passive sources, you would not have "maxed out" your Social Security earnings from that year.

When you claim can make a big difference in the maximum possible benefit

I mentioned earlier that the maximum Social Security benefit payable to a worker who claims benefits in 2018 at their exact full retirement age is $2,788 per month.

However, there's an eight-year window during which benefits can be started. Eligible workers can start receiving Social Security as early as age 62 or as late as age 70.

Early Social Security results in a permanently reduced benefit. A worker's primary insurance amount will be adjusted downward at a rate of 6.67% per year for up to three years before full retirement age and by another 5% per year for more than three years early. In fact, for a worker retiring in 2018 at age 62, the maximum possible monthly benefit they can get is $2,158 -- $630 less per month than the maximum at full retirement age.

Conversely, delaying Social Security results in a permanently increased benefit. The PIA is increased by a factor of 8% for every year a worker chooses to wait beyond full retirement age, until as late as age 70. This can result in a massive benefit increase for those who decide to wait -- the maximum Social Security benefit for a 70-year-old new retiree in 2018 is $3,698 per month, or $44,376 per year. This is an increase of more than $900 per month from the maximum possible benefit at full retirement age.

How this could change going forward

It's no big secret that Social Security isn't exactly in the best financial shape from a long-term perspective. In fact, if nothing changes, the current projections call for Social Security to run out of money by 2034.

There are several potential reforms that could help fix the problem, so there's no way to know for sure what will change going forward. Having said that, one way to partially solve the funding shortfall would be to increase or even eliminate the maximum taxable wage cap, which would likely increase the maximum Social Security benefit significantly, especially for those who are still years away from retirement age.

The point is that this discussion is about how much you would need to earn to get today's maximum possible Social Security benefit. The maximum benefit in 2019, 2020, and beyond could look rather different, so be sure to check again as your retirement date nears.

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