A new year brings fresh changes to Social Security. One of the most prominent changes is the cost-of-living adjustment (COLA), which will be 2.5% this year and is slated to boost the average retiree’s checks by just under $50 per month.
But the COLA isn’t the only change coming to the program. Every year, the program also adjusts various income limits that will affect everything from the maximum benefit amount to how much of your benefit might be withheld if you’re still working while on Social Security.
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If you’re not yet retired, there’s one figure in particular that could affect your finances both right now and once you begin claiming benefits: the maximum taxable earnings limit.
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There’s a limit to how much of your income can be taxed for Social Security purposes, and that cap is called the maximum taxable earnings limit. The more you earn up to this cap, the more you’ll pay in taxes — and the higher your future benefit will be.
The income limit will increase in most years to account for cost-of-living changes. In 2024, it will be $168,600 per year. Starting in 2025, though, it will increase to $176,100 per year.
This change will primarily affect those earning between $168,600 and $176,100 per year, as you’ll begin paying taxes on more of your income. But even those earning far less than the wage cap could still see an impact, as this limit will determine how close you are to the maximum benefit amount.
Starting in 2025, the most you can collect from Social Security is a whopping $5,108 per month. But one of the requirements for earning that payment is consistently reaching the maximum taxable earnings limit throughout your career.
The more you earn up to the limit, the higher your benefit will be. Once your income surpasses the wage cap, those earnings won’t be subject to Social Security taxes, nor will they affect your benefit amount. As the wage cap climbs higher each year, workers will need to continually earn more to have a chance at earning the maximum benefit.
Achieving the maximum payment is incredibly difficult, as it’s designed to be out-of-reach for the average worker. So, if you’re off-track, you’re in good company. However, there are other options for increasing your payments aside from simply earning a higher income.
Waiting a few years to claim Social Security is perhaps the single most effective way to substantially increase your payments. For every month you delay past age 62 and up to age 70, you’ll earn slightly larger payments.
In many cases, this can add up to hundreds of dollars more per month. According to December 2023 data from the Social Security Administration, the average retiree collects around $2,038 per month in benefits at age 70, while the average benefit at age 62 is just $1,298 per month — a difference of around $740 per month.
To calculate your benefit amount, the Social Security Administration averages your earnings over the 35 highest-earning years of your career. That figure is then run through a complex formula and adjusted for inflation, and the result is the amount you’ll collect at your full retirement age.
While you don’t need to work more than 35 years (in fact, you can generally qualify for retirement benefits after only 10 years of work), it can sometimes increase your benefit amount.
Most people see their income gradually increase as they advance in their careers. So, you’re likely earning a much higher wage by retirement than when you first started working. Since only your top-earning 35 years are included in your benefit calculations, working more years with a higher income can replace some of your lower-earning years in your average — increasing your benefit amount.
If you’re married or divorced, you could qualify for spousal benefits based on your partner’s work record. Divorced spouses must have been married for at least 10 years and be currently unmarried, and you’ll need to be at least 62 years old to qualify for either type of benefit.
In both cases, the maximum you can receive is 50% of the amount your spouse or ex-spouse will receive at their full retirement age. As of September 2024, the average spouse of a retired worker collects around $909 per month in benefits.
If you’re already entitled to retirement benefits, you can still collect spousal benefits if those payments are higher. However, you’ll only collect the higher of the two amounts — not both.
Social Security can go a long way in retirement, so it’s wise to know how any changes to the program might affect you. The more prepared you are heading into your senior years, the better off you’ll be.
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