How Much Do You Have to Earn to Get Maximum Social Security? What Is the Least Social Security Will Pay?
How Social Security Benefits Are Calculated
Social Security retirement benefits are based on the following:
- Lifetime earnings.
- Age at time of retirement.
Lifetime Earnings
Higher lifetime earnings result in higher benefits. The highest 35 years are used to calculate average monthly earnings. Each year is indexed for inflation to approximate what earnings for that year would be in today’s dollars. Earnings for each year are also capped by the Social Security maximum earnings subject to Social Security tax for that year. After calculating the average indexed monthly earnings, a formula is used to determine the primary insurance amount (PIA).
Birthday On January 1. Individuals born on January 1 of any year should refer to the previous year in this chart.
Age At Time Of Retirement
The amount of benefits also depends on the age when you decide to start collecting Social Security. Full retirement age is the age at which retirement benefits equal 100% of PIA. If benefits begin prior to full retirement age, benefits are permanently reduced. If benefits begin after full retirement age, benefits are permanently increased. By delaying the age at which you begin to receive Social Security, benefits may increase. It is not beneficial to wait past age 70.
Early Retirement Reduced Benefits
The earliest age a person can begin receiving Social Security benefits is age 62. The following table illustrates the effect on a primary beneficiary’s benefit, and a spouse’s benefit who normally would receive 50% of the primary beneficiary’s primary insurance amount (PIA) when Social Security benefits begin at age 62:
Taxable Social Security Benefits
A portion of your Social Security benefits may be taxable. Ask your tax preparer for more information.
Pension Income
Pension income paid to you as a retiree is generally taxable. An employee nearing retirement may be offered a choice in how a pension payment will be made. Pension options from a defined benefit retirement plan generally include a lifetime payment with no survivor benefit, a joint and 50% survivor payment, or a joint and 100% survivor payment. The joint and survivor benefits are reduced amounts from the lifetime payment option. Generally, once a pension option is selected, it cannot be changed.
IRA Distributions
Distributions from IRAs and other retirement plans are generally taxable. Roth IRA distributions are generally not taxable. With some exceptions, distributions taken before age 59½ are subject to a 10% additional tax.
Required Minimum Distribution (Rmd) Rules
Traditional IRAs
If you participate in a traditional IRA you must begin receiving distributions from the IRA by April 1 of the year following the year you turn age 72.
Roth IRAs
The RMD rules do not apply to Roth IRAs. Distributions are required only after your death.
Required Minimum Distribution
By the required beginning date, you must begin receiving periodic distributions from a traditional IRA in annual amounts calculated to distribute the entire interest in the account over your life expectancy or over the joint life expectancies of you and a designated beneficiary. Minimum distributions must be made by December 31 of each year. If you wait until April 1 of the year following the year you turn age 72, you must take two RMDs in that year; the first by April 1, and a second by December 31 of that same year.
Example: Irene turned 72 on August 20, 2021. She plans to take her 2021 RMD in March 2022. She must also take her 2022 RMD by December 31, 2022.
Required Minimum Distribution Calculation
The RMD for each year equals the IRA account balance as of December 31 of the preceding year, divided by the applicable distribution period, or life expectancy, for your age in the current tax year.
Distributions Greater Than RMD
There is no penalty for taking distributions in excess of RMD. A distribution greater than the RMD cannot be carried over and used to meet the RMD for the following year.
50% Penalty Tax On Excess Accumulations
The RMD rules are designed to make sure you distribute most of your retirement benefits during life, rather than passing them to beneficiaries after death. The penalty for taking less than the RMD out of an IRA or qualified retirement plan is 50% of the part of the RMD that was not distributed.
Early Retirement
Early retirees (individuals who retire before age 59½) are allowed to take distributions from retirement plans and avoid the 10% additional tax. If you are an early retiree, you must follow certain rules.
- Distributions must be taken at least annually in substantially equal amounts.
- Distribution amounts are determined by your life expectancy.
- Distributions must be taken for a minimum of five years beginning with the year of the first distribution. If, at the end of the five years, you have not yet attained the age of 59½, you must continue the distributions until attaining age 59½.