No matter how much you earn during your working years, it's almost always a mistake to rely exclusively on Social Security for income in retirement. Even at the extreme, your benefits are likely to replace only half of your pre-retirement earnings.
You can see this in the figure below, which charts the size of a person's primary insurance amount as a percent of pre-retirement income -- or, more specifically, as a percent of their average annual indexed income over their 35 highest-earning years.
Here's what this shows us: If your average inflation-adjusted income for your 35 highest-earning years was $30,000, then, assuming you wait until your full retirement age to apply for benefits, your Social Security check will replace only 51% of your pre-retirement income. At the other extreme, your benefits will replace a mere 22% of your pre-retirement earnings if you earned an average of $240,000 during your 35 most lucrative years.
Regardless of how much you previously earned, in other words, this is a problem, as most retirement experts estimate that you'll need to replace about 70% of your pre-retirement income in order to maintain your pre-retirement lifestyle. That's why any plan that involves relying exclusively on Social Security retirement benefits also entails a dramatic decrease in one's standard of living.
While this seems obvious, the sad truth is that a sizable share of retirees do just that. According to the Social Security Administration, "Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income."
There is one chief way to tilt this math slightly in your favor: You can wait until turning age 70 before applying for Social Security benefits. By doing so, you'll earn delayed-retirement credits, which add 8% to your annual benefits for every year that you defer taking them after reaching your full retirement age, which, at present, is 66 years old. Consequently, if you wait until turning 70, your actual benefits will be 32% larger than your primary insurance amount.
Here's how this impacts the chart above:
As you can see, while waiting as long as possible will indeed help to narrow the deficit, you'll nevertheless come up short of the 70% threshold of pre-retirement income that most experts say is necessary to avoid ratcheting back one's standard of living.
It goes without saying that this is little help to someone who's already in or on the cusp of retirement. But for younger workers with many income-earning years ahead of them, it underscores the importance of saving now and developing alternative sources of income that can supplement Social Security benefits later.
