When planning for retirement, it's important to know your "retirement number" -- that is, how much you need to save in order to produce enough retirement income. To do this, you also need to know how much you can expect from Social Security.
While it's impossible to accurately predict your future Social Security benefits based only on your current salary, we can get a good idea of what to expect based on your average earnings throughout your career. With that in mind, here's what your Social Security benefit might be if you earn $100,000 per year.
How Social Security benefits work
To be clear, it's impossible to tell you your future Social Security benefits with any level of accuracy based solely on the fact that you'll make $100,000 this year. There are simply too many other variables that determine your benefits.
Specifically, Social Security looks at all of your annual earnings throughout your working lifetime and takes your 35 highest-earning years, after adjusting for inflation. Your annual earnings, up to each year's Social Security taxable maximum, are each multiplied by an indexing factor, and the top 35 are then averaged together and divided by 12 to determine your average indexed monthly earnings. So, any given year of earnings can determine just one thirty-fifth, or about 2.9% of your total benefit.
If you have fewer than 35 years of covered employment, zeros will be averaged in for the missing years. In general, you need at least 10 years of Social Security-covered employment to be eligible for a retirement benefit on your own work record.
The 2018 Social Security benefit formula
For people reaching the age of eligibility in 2018, your averaged indexed monthly earnings will be applied to the following formula in order to determine your Social Security benefit at full retirement age.
- 90% of the first $896
- 32% of the amount greater than $896, but less than $5,399
- 15% of the amount greater than $5,399
Also, bear in mind that this assumes that you'll claim your Social Security benefit at exactly your full retirement age, which the majority of retirees don't do. In fact, the most common age to claim Social Security is age 62 -- as early as possible -- and more than half of Americans claim at age 65 or earlier.
The Social Security Administration has formulas to determine benefit reductions and increases for any given claiming age, but just to mention the extreme cases, if your full retirement age is 67, claiming at 62 will result in a permanent 30% reduction, while waiting until 70 will result in a permanent 24% increase.
How much would a $100,000 worker get in retirement?
With the benefit formula in mind, we can easily determine how much a worker who earns an average salary of $100,000 (inflation-adjusted) throughout their career would get from Social Security if they claimed their benefit in 2018.
An annual salary of $100,000 translates to a monthly income of $8,333. Applied to the three parts of the benefit formula gives us a monthly benefit of $806.40 + $1,440.96 + $440.10, or $2,687.46 at full retirement age. This is about $100 less than 2018's maximum possible Social Security benefit at full retirement age of $2,788.
If you're still several years away from claiming Social Security, keep in mind that Social Security benefits are adjusted annually to keep up with inflation, a process known as cost-of-living adjustments, or COLA.
While the index used to determine each year's COLA is far from perfect, if you average a $100,000 income throughout your 35 highest-earning years, you can expect to receive roughly the same amount as we calculated here, in terms of 2018 purchasing power.
Subject to change
Finally, it's important to mention that the entire process for calculating Social Security benefits can change in the future, especially if you still have a long way to go until retirement.
While Social Security has plenty of money in reserves for now, it won't last forever. In fact, unless something is done to fix the program's projected financial shortfall, Social Security is expected to run out of money in 2034.
Here's the point. There are two main ways it could be fixed: tax increases or benefit reductions. And some of the benefit reductions being considered would alter the calculation formula, such as using 38 years of employment instead of 35 to calculate average earnings, or creating a fourth "bend point" in the calculation formula that would effectively reduce benefits for higher-income workers.
So, while this discussion is valid for someone who earns $100,000 based on today's benefit formula, the way benefits are calculated, and therefore the amount someone who earns $100,000 can expect, is subject to change in the future.