Social Security is a crucial component of most Americans' retirement planning. Even those who earn six-figure salaries face the challenge of ensuring that they've set enough money aside for their retirement needs. Using tools like IRAs, 401(k) plans, and other tax-favored accounts is essential to put yourself in the best position to retire comfortably, but Social Security will still make a significant contribution toward your financial security in your golden years. Here you'll find a simple analysis of what those who make $100,000 can expect from Social Security and how to account for it in your broader financial plan.
What $100,000 earners pay in Social Security payroll taxes
Those who earn $100,000 a year will have payroll taxes taken out of their pay all year long. That's because the wage base limit on Social Security for 2018 is $128,400. You'll pay 6.2% of your earnings, or $6,200, toward Social Security. Your employer will withhold that amount on your behalf, as well as kicking in an additional $6,200 to go toward the employer Social Security contribution requirement.
Because you've paid taxes on all of your earnings, your $100,000 in earnings will be added to the 35-year work history that the Social Security Administration uses to calculate your benefits. You'll also earn the maximum of four credits for purposes of qualifying for retirement benefits, with a total of 40 needed throughout your career to get Social Security after you retire.
Note that those who work for certain state and local public employers aren't subject to Social Security tax. For them, alternative pension arrangements are generally available that have their own rules. You won't have money withheld from your paycheck, but you also won't have those earnings counted in your earnings history for Social Security purposes.
1 year in a long career
Because Social Security benefits are determined based on a 35-year career, making $100,000 in 2018 won't have a huge impact on your overall benefit amount. The big question is whether $100,000 will be a consistent level of earnings throughout your career, or whether it represents a one-time windfall that's unlikely to happen again.
Bear in mind, though, that the SSA takes inflation into account in looking at your wage history. So if you've gotten regular modest raises during your career, then your average indexed monthly earnings -- which is the key number used to calculate your eventual Social Security benefits -- might well be close to the $8,333 that a $100,000 salary would suggest. If you've just recently moved into a much higher-paying job to reach $100,000, then your average earnings across your career might well be less.
What $100,000 earners can get from Social Security
To keep things simple, let's look at a situation in which someone turning 62 in 2018 has already worked for 35 years and has seen raises along that timeframe in line with the inflation measure that Social Security uses to index earnings. In that case, average indexed monthly earnings will be $100,000 divided by 12, or $8,333 per month.
To figure out your monthly benefit amount in 2018, you'll need to use the bend points that the SSA provides. Begin by taking 90% of the first $895 you make monthly, and then add 32% of the amount between $895 and $5,397. Finally, put in 15% of the amount above $5,397. Filling in the numbers, 90% of $895 is $805.50, 32% of the next $4,502 is $1,440.64, and 15% of the remaining $2,936 is $440.40. Combine those numbers, and you get a full retirement age benefit of $2,686.54. That's what you'd get if you wait until you're 66 years and four months old before claiming.
On an annual basis, that works out to $32,238 in yearly Social Security income. That means Social Security will be able to pay you almost a third of what you were receiving in pre-tax earnings during your career. That leaves you on the hook to find the remaining two-thirds elsewhere if you spent everything you earned during your career and want to keep doing so in retirement.
Some alternative situations
Two other situations often come up. First, many who reach 62 in 2018 will want to claim Social Security benefits immediately. Doing so would reduce your monthly benefit to $1,970, because under current rules, the reduction for taking early benefits would amount to nearly 27%. By contrast, if you were to wait until age 70 before claiming, then you'd get a more than 29% increase in your monthly benefit check, which would amount to nearly $3,475 per month.
Second, many people don't work a full 35-year career. If you earned $100,000 for half of that period, then your benefits would be lower. However, your monthly check wouldn't get cut in half. Using the same benefit formula on average monthly earnings of $4,167 -- half the amount above -- produces $1,852.54, That's almost 70% of the benefits someone making that amount throughout 35 years would get -- a pretty good payout in exchange for paying just 50% of the payroll tax along the way.
Get what you can from Social Security
Even those who had high incomes of $100,000 per year can expect a lot from Social Security. Adding to your benefits by using retirement accounts is a smart move, but you won't have to cover every bit of your anticipated expenses out of your own pocket.