HomeBusinessThe unfortunate truth about receiving the maximum Social Security benefit of $4,873

The unfortunate truth about receiving the maximum Social Security benefit of $4,873

Many people strive to maximize their Social Security income, but squeezing every possible cent out of the program may not be worth it for most.

The maximum monthly retirement benefit in 2024 is $4,873. Receiving that amount requires a long, well-paying career and a lot of patience. But if you plan to rely on social security as soon as you stop working, you may find that aiming for the maximum monthly benefit is not enough.

Here’s the unfortunate truth about receiving the maximum Social Security benefit of $4,873.

Two checks from the US Treasury Department.

Image source: Getty Images.

You have to wait until you’re 70 to get it

Although you can apply for Social Security retirement benefits starting at age 62, you must wait until age 70 to receive the maximum possible monthly benefit.

Each month you wait to claim your benefits, the Social Security Administration will increase the monthly check it sends you. Your payout is based on the amount of your primary insurance. This is the amount you will receive at full retirement age. The full retirement age ranges from 66 to 67, depending on when you were born. Those born in 1954 or earlier reach full retirement age at age 66. But the full retirement age increases by two months for each year a person is born after 1954, before reaching age 67 for those born in 1960 or later.

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If you file for benefits before your full retirement age, you will receive less than the amount of your primary insurance each month. For every month you wait longer than your full retirement age, the Social Security Administration adds 2/3 percentage points to your monthly benefit. That means 70-year-olds who claimed Social Security this year received 32% more than their primary insurance amounts.

Here’s more bad news for those who want to take full advantage of Social Security: As the full retirement age rises, the maximum benefit won’t be worth as much relative to the amount of your primary insurance as it used to be.

It doesn’t replace the majority of your income

Since receiving the maximum monthly benefit of $4,873 requires you to earn a high income, this will not replace a significant percentage.

The minimum amount you needed to earn to maximize Social Security contributions in 2023 was $160,200. A monthly benefit of $4,873 replaces only 36.5% of that amount. And even if you earn more, you can still only receive $4,873 per month.

The reason Social Security replaces relatively little of your income at this level is because it is a progressive program. For lower-income individuals, a much larger percentage of their income will be replaced by Social Security after retirement. Those with higher incomes will see a lower percentage replaced.

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If you weren’t saving much for retirement while earning such a high salary, you probably have very high living costs. Social Security alone won’t cover them. You’ll probably need some hefty 401(k), IRA and brokerage balances to make up the difference.

Taxes can be a significant burden

When you receive such a large Social Security check, it’s hard to avoid paying high taxes.

The way the government taxes your Social Security benefits uses a measure called “combined income.” The combined income is equal to half of your Social Security benefits, plus your adjusted gross income, plus any untaxed interest income you received. If your combined income exceeds a certain threshold, part of your income will be taxed.

Your benefits are:

If you are an individual with

Or married jointly submit with

Up to 50% taxable

Combined income > $25,000

Combined income > $32,000

Up to 85% taxable

Combined income > $34,000

Combined income > $44,000

Table source: Author. Data source: Social Security Administration.

With a monthly benefit of €4,873, your combined income for 2024 would already be €29,238 before adding other income. As you start adding income from withdrawals from retirement accounts or capital gains on your investments, you will likely make more and more of your Social Security income taxable.

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Additionally, the marginal tax rate on certain tax strategies, such as Roth IRA conversions or capital gains harvesting, could be unfeasible when collecting such a large Social Security check. That’s because every extra dollar of income from conversions or capital gains can also squeeze an extra $0.85 in Social Security benefits into your taxable income. Some financial planners call this phenomenon Social Security’s tax torpedo.

While paying taxes on a high income isn’t the worst thing in the world, it can still take up a large chunk of your retirement budget. So make sure you take taxes into account if you plan to receive the maximum possible Social Security benefit.

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The Unfortunate Truth About Receiving the Maximum Social Security Benefit of $4,873 was originally published by The Motley Fool

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