The amount of money you'll get each month from Social Security is based on your 35 highest-earning years, indexed for inflation. So, it's tough to determine how much you'll get from Social Security by simply knowing how much you make now. However, by knowing how your Social Security benefit is determined, and by making a few assumptions about your future income, you can get a good ballpark estimate.
How Social Security benefits are calculated
As I mentioned in the introduction, your Social Security benefit depends on your 35 highest-earning years when indexed for inflation, up to a certain taxable maximum each year. In 2017, Social Security taxes are only assessed on earned income up to $127,200, so this is the maximum amount of income that will be considered for 2017 when calculating your future benefit.
Your top 35 years are then averaged together and divided by 12 to produce your lifetime monthly average earnings. This is then applied to a formula to determine your initial retirement benefit. As of 2017, this formula is:
- 90% of the first $885
- 32% of the amount between $885 and $5,336
- 15% of the amount above $5,336
If you make $120,000, here's your calculated monthly benefit
As I said, without knowing your past and future earnings, it's difficult to estimate how much your future Social Security retirement benefit will be. Having said that, here's a ballpark estimate if you expect to make about $120,000 (in 2017 dollars) throughout your career.
Assuming that you earn an inflation-adjusted $120,000 for at least 35 years, and that the maximum taxable Social Security wage base is $120,000 or higher during these years, this would translate to a lifetime monthly average of $10,000.
According to the Social Security benefit formula in the previous section, this would produce an initial monthly benefit of $2,920 at full retirement age.
But wait -- that's more than the maximum possible benefit
The maximum possible monthly benefit for someone who claims Social Security at full retirement age in 2017 is $2,687 per month. You'll notice that the calculated benefit if you earn an inflation-adjusted $120,000 per year throughout your career is $233 more than the maximum possible benefit.
I won't get too deep into the mathematics here, but the short version is that in previous years, the maximum taxable Social Security wages were less than the 2017 equivalent of $120,000. Just to name one example, the maximum taxable Social Security wages in 1990 was $51,300. The Social Security Administration uses an inflation factor of 2.29 for that year, which translates to an inflation-adjusted maximum of $117,447. In other words, if you had earned $120,000 (in 2017 dollars) in 1990, not all of your income would be counted.
In fact, the inflation-adjusted wage cap was below $120,000 in nearly all previous years. The taxable earnings limit is adjusted over time to keep up with wage growth, so it remains to be seen whether the limit will remain at or above an inflation-adjusted $120,000 going forward.
The point is that if you earned $120,000 per year for the past 35 years, thanks to the annual maximum taxable wage limits, the maximum Social Security benefit you could get at full retirement age is $2,687.
For a better estimate
As I mentioned, it's tough to estimate your future Social Security benefit based on just one year's earnings.
For a better estimate, it's a smart idea to create an account at www.ssa.gov if you haven't done so already. From there, you can view your most recent Social Security statement, which will give you an estimate of your Social Security benefit based on your actual work history and expected salary increases. You'll also find other important information, such as eligibility for disability and survivor benefits, so it's a smart idea to take a few minutes and check your Social Security statement each year for an updated estimate.