Retirement is a significant transition in life. And it is important to make sure you have a secure financial situation in place. One crucial component of retirement planning is knowing how much you need to earn to receive the maximum Social Security benefits.
In this article, we will explore what Social Security benefits are, how they are calculated, and how much you need to earn to maximize your benefits. So, whether you are just starting your retirement planning or you are getting close to retirement age, read on to learn more about maximizing your Social Security benefits.
What are Social Security Benefits Actually?
Social Security is a government program that provides economic security to retired, disabled, and survivor individuals and their families. Essentially, it is financed through payroll taxes and is intended to supplement your other retirement income.
So, the more you earn, the better the benefits.
How are Social Security Benefits Calculated?
Social Security benefits are calculated based on your lifetime earnings. The more you earn, the higher your benefits will be. Social Security calculates your benefits through a formula that takes into account your 35 highest earning years.
Once Social Security calculates your benefits, you will be eligible to receive them when you reach your full retirement age. Your full retirement age is determined by your birth year and ranges from 66 to 67. You can begin to receive benefits as early as 62. But this will result in a reduction in your monthly payments.
To receive the maximum Social Security benefits, you will need to have the maximum earnings for 35 years. In 2021, the maximum earnings for Social Security taxes are $142,800. If you earn that amount or more every year for 35 years, you will receive the maximum Social Security benefit.
How Much Salary do you Need to Maximize Your Social Security Benefits?
Once you know the maximum earnings, you need to understand how much you need to earn each year to receive the maximum benefit. The average earnings for Americans are $51,640 per year. However, if you want to receive maximum benefits, you will need to earn at least $142,800 for 35 years.
However, if you do not earn the maximum amount every year, do not worry. Social Security uses an average of your highest earnings to calculate your benefits. So, even if you do not earn the maximum amount every year, you can still increase your benefit by earning more.
What Happens if You Don't Have 35 Years of Earnings?
If you have not worked for the entire 35 years, Social Security will use zero earnings for the missing years. This will lower your overall average earnings. Thus also lowering your overall Social Security benefits.
Therefore, it is important to work for at least 35 years to maximize your benefits. If you are close to retirement age and have not worked for 35 years, consider working a few more years to increase your earnings and boost your Social Security benefits.