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How Much of My Income Will Social Security Replace in Retirement?

By Todd Campbell - Updated Oct 18, 2018 at 1:24PM

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Social Security payments will replace roughly 40% of an individual's pre-retirement income.

Social Security payments are a critical component of most retirees' income, and currently, the Social Security Administration reports that Social Security payments represent half of retirement income for more than half of all married Social Security recipients.

Will Social Security represent a similar share of your retirement income too? Read on to learn how much of the average American's income is replaced by Social Security in retirement, how to calculate your Social Security benefit, and how Social Security might change in the future.

A mature African American couple consults a calculator while planning finances

Image source: Getty Images.

First, a bit of background
Social Security is a program designed to provide a safety net to older Americans.

To qualify for Social Security income, a person needs to earn 40 credits, which is the equivalent of 10 years of work. Individuals can start receiving discounted monthly Social Security benefits as early as 62 years old, but recipients must wait until full retirement age, which is currently 66, to receive 100% of their retirement benefit. 

Overall, the Social Security system is a pay-as-you-go system. with payments made to current recipients funded by a 12.4% payroll tax on the income of current workers. That payroll tax is split equally between employees and employers, and it applies only to income of up to $118,500 per year.

How much of my income will Social Security replace?
Although the program was never intended to replace the lion's share of a person's pre-retirement income, it is designed to replace roughly 40% of pre-retirement wages.

In 2016, the average Social Security income paid to a retired worker is $1,341 per month, or $16,092, however, monthly payments can vary widely based on each individual's work history.

If you're a high income earner, your Social Security check will be bigger in retirement. However, because multipliers used to calculate Social Security monthly benefits decrease as income increases, the percentage of your pre-retirement income that Social Security replaces will be less than it is for lower income earners (more on that in a minute).

The monthly retirement benefit paid to retired workers varies widely, but most recipients receive between $700 and $1,800 per month in Social Security benefits.

DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.

Those monthly benefits are determined by a complex formula. First, each year of income, up to predefined limits, is adjusted into current dollars. Then, the highest 35 years of income are added up and divided by 420 (the number of months in 35 years) to get an average of the income you've earned per month over your entire work history.

Finally, those multipliers I mentioned earlier are used to figure out your specific monthly Social Security benefit. For example, if you were born in or after 1954, the first $856 of your adjusted monthly earnings would be multiplied by 90%, any amount between $856 and $5,157 would be multiplied by 32%, and any amount above $5,157 would be multiplied by 15%. Those results are added together and rounded down to the nearest dollar. and that figure becomes your estimated monthly retirement benefit at full retirement age.

Because multipliers decline as income increases, people with higher incomes get less of their pre-retirement income replaced by Social Security income.

For example, let's consider two hypothetical adjusted pre-retirement income scenarios: a pre-retirement income of $856 per month and a pre-retirement income of $10,000 per month. Running through the multipliers, the $856 scenario would result in a benefit of $770, or 90% of pre-retirement income, while the $10,000 scenario would result in a $3,000 benefit, or 30% of pre-retirement income.

Additionally, the percentage of pre-retirement income that Social Security income replaces depends on when you begin taking it. If you take Social Security before full retirement age, which is currently 66, then you'll receive less than you would at full retirement age and thus, replace less of your pre-retirement income. Alternately, if you wait until as late as 70 years old to collect Social Security, your payments will be bigger than they'd be at full retirement age and thus, Social Security would replace more of your pre-retirement income.

A retired woman sits on a beach and gazes thoughtfully at the sunset.

Image source: Getty Images.

Monkey wrenches
Because Social Security payments are paid by current workers, a shrinking pool of workers caused by retiring baby boomers means that Social Security payroll tax revenue is coming up short.

That shortfall is made up for by tapping the Social Security Trust Fund, but government calculations estimate that the Social Security Trust Fund will be unable to support all payments to all recipients beginning in 2030.

Therefore, it's widely believed that changes need to be made to Social Security to ensure its long-term viability. Increasing the payroll tax, reducing benefits by altering the payout calculation, and increasing the full retirement age are among changes being discussed. Admittedly, those aren't palatable choices, but absent change, the Congressional Budget Office estimates the average payment to all recipients in 2030 would need to be cut by 29%.

The risk of such a substantial reduction in payments suggests that you may not want to count on having Social Security replace 40% of your pre-retirement income. By increasing your contributions to tax-advantaged retirement savings accounts, including IRAs and 401(k)s, you might better guarantee a financially secure retirement by reducing your reliance on Social Security income.

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