In 2022, the maximum monthly Social Security benefit is $4,194 per month. For retirees receiving closer to the average monthly benefit of $1,657 per month, a Social Security check that produces a whopping $50,328 in annual income may seem extremely generous.
The reality, however, is that getting a $4,194 Social Security check actually isn't as great as it appears. In fact, most of the people who receive so much money aren't actually benefiting from Social Security as much as their counterparts who receive much less. Here's why.
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The problem with a $4,194 Social Security benefit
The big reason why a $4,194 Social Security benefit isn't nearly as great as it seems is because of the requirements you must fulfill to get it.
In order to receive so much monthly Social Security income, you'd have to claim your benefits at 70, while most people start them sooner. You'd also need to earn an income equal to or exceeding the wage base limit in at least 35 years of your career.
The wage base limit is the maximum amount of earnings subject to Social Security tax and counted when benefits are calculated, which is $147,000 in 2022. And although it changes each year, it's always the inflation-adjusted equivalent of that amount.
In other words, only very high earners are going to get a $4,194 Social Security benefit. This group of retirees is unlikely to be able to live on $50,328 in annual income. And while the monthly amount they're receiving might seem generous, they'll actually end up getting less money relative to their prior earnings than retirees whose checks are much smaller.
Higher-income workers don't replace as much income with Social Security
Higher earners don't get as much value from Social Security as lower-earning workers do, even though their monthly benefit is bigger. That's because Social Security is a progressive program. Retirees get benefits equaling:
- 90% of average earnings up to a certain income level.
- 32% of average earnings between that first income level and a second higher threshold.
- 15% of average earnings above that second threshold.
In other words, the more you earn, the less of your income counts in calculating your Social Security benefit.
The result is that while America's lowest earners get around 53% of their income replaced by their benefits, the highest earners in the country only get around 26% or less replaced. This chart shows how this ended up working out for the typical 65 year old in 2020.
Chart created by author. Data source: National Academy of Social Insurance.
As this chart makes clear, while a higher earner would have a Social Security benefit that seems generous, the income they'll get from their retirement checks wouldn't provide nearly enough money to maintain the standard of living their earnings allowed them to enjoy while working.
Do this instead of counting on a big Social Security benefit
All of this means that, regardless of whether your Social Security checks equal the maximum monthly benefit or far below it, you cannot live on benefits alone. You'll need plenty of supplementary savings, which can come from a solid retirement investment portfolio.
Fortunately, building one doesn't have to be hard -- regardless of income level. If you start saving early and acquire a mix of different stocks across multiple industries or build a portfolio of exchange-traded funds, you should hopefully amass a nest egg large enough to allow you to enjoy a retirement free of financial worries.
While investing in individual stocks can sometimes allow you to beat the market and build the portfolio you need for a secure retirement, exchange-traded funds can be simpler and easier to select. They can be a great choice for workers and retirees who don't have the time or knowledge to build a customized investment portfolio.
ETFs give you exposure to a basket of assets, such as all the stocks in the S&P 500 if you buy an S&P 500 index fund. They provide instant diversification and low fees, so almost anyone can do well investing in them.
Just don't assume that a Social Security check that sound generous will be sufficient. Make plans to provide for yourself in your later years.
