Social Security provides the bulk of retirement income for most people and, in particular, if your earnings are at or below the median income for Americans overall, you're more likely to rely more heavily on Social Security after you retire. After all, when it's tough to make ends meet on a modest salary, finding ways to save for retirement becomes a lot more challenging. That's one reason why the Social Security program is structured to replace a higher percentage of income for those with more modest incomes. Below, we'll take a closer look at how much those making $30,000 a year can expect to get from Social Security in benefits in exchange for the taxes they pay into the system, and why the program is often a better deal for lower-income earners than for their higher-earning counterparts.
What Social Security taxes cost lower-income earners
Workers who earn $30,000 per year pay payroll taxes on all of their income, because the wage base limit on Social Security taxes is almost four times that amount. Therefore, you'll pay 6.2% of your salary, or $1,860. Your employer will pay the same amount to the federal government, because the law imposes an equal tax on employers as well.
For determining benefits, you'll get full credit for your earnings as long as it was subject to payroll taxes. That applies to workers for all private employers and for the majority of government workers as well, with the exception of those relatively few state and local government entities that don't participate in Social Security and have their own pension programs instead.
What you'll get from Social Security
To be clear, you can't just figure your Social Security benefits by looking at your current salary. Because the Social Security Administration calculates your benefits based on your 35 highest-earning years in your career, the question is whether your earnings have risen at a faster rate than inflation in the past or will do so in the future. If you've earned $30,000 for several years going into the past, then your benefits will be larger than if you earned less in past years and enjoyed raises over the same time period. Similarly, if you keep earning $30,000 in the future, Social Security will pay you less than you'd get if you earned raises in future years.
Nevertheless, making some simple assumptions makes it possible to approximate how much you'll get from Social Security. To simplify things to the maximum extent, we'll look at benefits for someone who made the inflation-adjusted equivalent of $30,000 for their entire 35-year work career. Your experience will differ, but the result will give you a starting point from which to compare your own situation.
Under this assumption, your average indexed monthly earnings would be $2,500 per month. The SSA's benefit formula for someone retiring in 2016 involves taking 90% of the first $856 in monthly earnings, and then adding in 32% of earnings between $856 and $5,157 and 15% of earnings above $5,157. For a $2,500 amount, 90% of $856 is $770.40, and 32% of the remaining $1,644 is $526.08. That adds up to $1,296.48. Therefore, if you retire at full retirement age, which is currently 66, you'll get almost $1,300 as your monthly benefit.
One noteworthy conclusion from this calculation is that Social Security replaces a substantial portion of lower-income individuals' earnings. In this example, workers get more than half of their working income replaced by Social Security. That compares to just over 40% for those making $60,000 and barely more than a quarter for those with earnings of $120,000 annually.
However, it's important to remember that these benefits can vary depending on when you take them. Claim Social Security at 62, and you'll only get about $972 per month. Wait until 70, and you'll boost your monthly take to $1,711.
As is the case with those of all income levels, those who retire after careers shorter than 35 years get an even higher percentage of their average income replaced. For instance, if you worked just half of the 35-year history of the example above, your average earnings would be $1,250 rather than $5,000. Put that number in the formula, and it spits out $896.48. That's almost 70% of the monthly amount that someone who worked twice as long receives, even though your payroll tax cost was just half.
Make sure your finances will work
Lower-income individuals can count on Social Security replacing a fair amount of their pre-retirement salaries. However, it is still important to have other sources of savings and income beyond Social Security in order to make up the shortfall between your career income and what Social Security will pay. If you can do that, then you'll have addressed one of the most difficult challenges facing retirees with modest means.
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