The Most Important Social Security Chart You'll Ever See

Typical retirement advice is that you should try to replace 70% to 80% of your pre-retirement income with your investments and other income in retirement. An important piece of that equation is Social Security. But retirees hoping Social Security will do most of the heavy lifting may be surprised when those checks are less than they hoped.

It's important for everyone to know how Social Security benefits are calculated so they can make prudent retirement savings decisions. One chart will show you why you can't rely on Social Security alone.

How much of your income will Social Security replace?

You probably know Social Security is calculated based on your earnings history. You may or may not know that Social Security uses a progessive system to ensure low earners still receive meaningful income from the social insurance program. If you're a median to high earner, the percentage of your income replaced by Social Security in retirement might be lower than you thought.

Data source: Social Security Administration, author. Calculations by author.

As you can see, the percentage of your income you can expect Social Security to replace falls quickly for anyone who earns an average of more than $12,000 per year throughout their career. If you earn more than $20,000 per year, you'll fall short of that 70% benchmark retirement planners are fond of.

You can boost your monthly Social Security check by delaying your benefits. Most readers will be able to delay a maximum of three years, until age 70. That will provide a 24% boost to your monthly benefits. Even so, you'll fall short of the 70% benchmark if you earned more than $29,000 per year in your career. 

Note, those are adjusted average incomes, so earnings from earlier in your career need to be adjusted upward. You can find the indexing series the Social Security Administration uses to adjust your earnings from prior years on its website.

The all-important "bend points"

The amount of your Social Security benefit is determined by a simple formula.

First, you must calculate your average indexed monthly earnings, which takes your income from the 35 years of highest earnings, indexed for inflation, and divides it by 12 (the number of months in a year).

Then it uses "bend points" to determine your benefit. Here are the bend points for 2022.

Data source: Social Security Administration. Table by author.

The benefits formula works like our tax brackets (except in reverse). Everyone receives 90% of their income back in benefits for the first $1,024 of monthly earnings. If you earn more than that, you'll only collect 32% of any earnings above $1,024. And if you earn more than $6,172 per year, you'll only collect 15% of earnings above that until you reach the maximum taxable earnings threshold for Social Security. That's $147,000 in 2022.

That formula will determine how much you'll receive if you claim your benefits at your full retirement age. The amount is then adjusted if you claim earlier or later.

What it means for retirement planners

Since most people can't rely on social security to offer enough income to support their retirement needs, they need to have meaningful savings outside of Social Security. The chart above may help inform how much you need saved in order to provide for a secure retirement.

For example, a person who earned an average salary of $60,000 throughout their career may need a portfolio that can replace 30% of their income in retirement while Social Security replaces about 44%. Using the 4% rule suggests a portfolio of $450,000 will provide the necessary income to supplement social security.

The good news is if you start saving early, achieving a decent-sized portfolio by the time you're ready to retire isn't as hard as you might think. If you can save every month to invest, compound earnings will help even modest amounts grow into a substantial nest egg. 

If you're finding this information later in life, make every move you can to maximize your retirement savings. Take advantage of tax-advantaged retirement accounts, a 401(k) savings match if your employer offers it, and catch-up contribution limits. Making a few small sacrifices now means you won't have to make big sacrifices later.