As we approach retirement, it is natural for us to want to learn more about social security since it will represent approximately 40% of the average retiree's income. For many others, social security will make up most or all their retirement income.
Other sources of income can include pensions and 401(k)s/403(b)s, investments, bond interest, real estate income, and savings, among other things.
I am an instructor for the American Financial Education Alliance (AFEA) and it is no surprise to me that, given its importance and complexity, the classes that consistently draw the highest number of attendees are those discussing social security.
What follows are five things you need to know to get the most out of social security and live your best life in retirement.
Social Security Earnings Limit
If you are collecting social security before your full retirement age, social security will withhold some amount of benefits. The amount that is withheld depends on the degree to which your income exceeds the earnings limit for that year.
In 2025 that number is $23,400 ($1,950 per month). Once you exceed that limit, for every $2 you earn, social security will withhold $1 from your annual benefits.
For example, if someone earned $43,400, $20,000 above the earning limit, social security would withhold $10,000 in benefits.
It is important to note that this earnings limit increases in the year you turn your full retirement age. That limit in 2025 is $62,160 ($5,180 per month.) Once you exceed that threshold, social security will begin withholding $1 for every $3 of income over the limit.
An important thing to remember is that the earnings limit applies only once you begin receiving social security benefits. Imagine someone began receiving social security on July 1st. Suppose further that they earned a million dollars from January 1st to June 30th. Provided they earned no income after July 1st, their benefits would not be reduced by the earnings limit. Of course, they would still be responsible for paying taxes on some of their social security benefits, but we will get to that shortly.
Finally, once you turn your full retirement age, for most people that is 66 or 67, there is no limit on the amount of money you can earn. Your benefits will not be reduced because of your income.
Social Security Wage Base
The 2025 social security wage base is $176,100. What this means is that this is the income threshold up to which we pay social security taxes, also known as payroll or FICA taxes.
FICA taxes are levied to fund social security and Medicare and they are deducted from our income up to that wage base. The percentage we pay is 7.65% and that amount is matched by our employer. Of that 7.65%, 6.2% goes toward funding social security and 1.45% goes to Medicare.
Any amount we earn beyond $176,100 is not subject to the social security portion of FICA, but we and our employer must each still pay 1.45% Medicare tax on income beyond that limit.
What is the Maximum Social Security Benefit and How Can We Obtain it
That depends on a number of factors such as how long we have paid into the system, our earnings record and the age at which we choose to receive benefits. Keep in mind that we can take social security as early as age 62 and can defer it as long as age 70.
The sooner we take it, the lower our benefit will be. Assuming we have maxed out our earnings each year and have a full 35 years of contributions (FICA taxes), the maximum benefit we can receive in 2025 at age 62 is $32,520 or $2,710 per month.
At full retirement age, for most people that will be between 66 and 67 years old, the highest benefit we can receive is $48,216 or $4,018 per month.
If you delay until age 70 the maximum benefit you can collect is $61,296 or $5,108 per month.
It is important to add here that social security takes your 35 highest years of earnings into account when calculating your benefit. Any number of employment years fewer than 35 will be counted as zeros. So, to get the highest possible benefit, we need 35 years of employment, even if some of those years are part-time.
To sum up, in order to get the highest possible social security benefit, we must max out our income and therefore our contributions. We must do so for a full 35 years, and we must defer collecting benefits until age 70.
Some of you may be thinking, "That's all fine and dandy, but I don't make $176,100 per year." Do not be put off. The first dollars you earn figure much more heavily into the benefit calculation than later dollars. Those thresholds are known as:
Social Security Bend Points
The way your social security benefit amount is calculated, in part, is by using what is known as bend points. In 2025 the first bend point is $1,226 of monthly income. The second bend point is between $1,226 and $7,391. And the third bend point is any amount above $7,391 of monthly income.
What this means is that 90% of your income within the first bend point counts toward determining your social security benefit at full retirement age. Within the second bend point, 32% of your earnings will be used in the calculation. And in the third bend point, 15% of those dollars will be used to determine how much you will receive at full retirement age.
As you can see, social security benefits are means tested. If you have maxed out your income/contributions over the decades, you will receive a larger dollar amount than someone who earned less than you. However, that dollar amount will be a smaller proportion of what you paid into the system than those in the lower income brackets.
Moreover, for those looking to maximize their social security income, but who also want to pare back the amount of time they spend working, consider working part-time until you have the full 35 years of paying into the system. Given the disproportionate weight added to the first dollars earned in the bend point calculation, that could have a massively positive effect on your benefits.
Provisional Income
Provisional income is the formula for determining how much of what you receive from social security will be taxed. Please keep in mind that I am referring here to federal taxes. Most states do not tax social security. Please check with your state of residence for more.
At the federal level, 0% to a maximum of 85% of your social security benefits are subject to income tax. This does not mean that they will be taxed at 85%! It means that up to that amount of your social security can be included in your taxable income. Calculating your provisional income will determine how much of what you receive from social security is subject to federal taxes.
The way provisional income is calculated is by taking your adjusted gross income (AGI) minus social security, combining it with any tax-free bond interest, such as that received from municipal bonds, and adding back in 50% of your social security benefit.
If you are married and your provisional income is below $32,000 ($25,000 if single), none of your social security benefits will be taxed at the federal level.
Between $32,000 and $44,000 ($25,000-$34,000 if single), up to 50% will be taxed. And any amount over $44,000 (34,000) up to 85% of your social security benefit will be included in your federal taxable income.
It is crucial to remember that these numbers were instituted in 1983 and were not indexed for inflation. This means that every year, fewer and fewer people will fall below the thresholds. Put another way, every year a greater number of people's benefits will be taxed.
Navigating the social security landscape can be tricky as there are so many important things to remember. Moreover, as you have seen, there are several moving targets in maximizing your benefits.
You see, it is not just a question of social security and your other income sources. To maximize and optimize our total retirement income, we must integrate them so they are all working together to create the greatest net benefit for you and your loved ones.
If you would like assistance in navigating social security or traversing the retirement income landscape, call me at (732) 844-3000. I am here to help.
Scott R. McGimpsey March 26th , 2025
Certified Financial Fiduciary®
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