Social Security is designed to provide much-needed retirement income to American seniors. While the Social Security benefit formula is certainly weighted in favor of lower-income workers, there are higher benefits to be had by workers who earned more throughout their careers. With that in mind, here's a discussion of how much retirement income you might be able to expect from Social Security once you've attained a six-figure salary.
The problem with estimating Social Security based on income
Before we go any further, it's important to emphasize that it's impossible to estimate your future Social Security benefits with any degree of accuracy based on any single year's earnings. It's not even very helpful to know what you earned for the past 5 or 10 years.
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Social Security uses all of your career earnings to help determine your monthly benefit. So if you earn about $100,000 (inflation adjusted) every year throughout your career, your Social Security benefit will be rather different from that of someone who earned $30,000 for most of their career and just recently got a big income boost to the six-figure range.
Having said that, using the Social Security benefit formula, we can get a good idea of how much someone who earns about $100,000 per year for their entire career can expect.
How the Social Security benefit formula works
As I mentioned, the Social Security benefit formula considers all of your earnings in employment covered by Social Security (this is most types of employment in the United States). You can read a thorough discussion of the Social Security benefit formula I wrote recently, but here's the quick version:
Each year of your earnings, up to the Social Security taxable maximum for that year, is indexed for inflation. Then the 35 highest inflation-indexed years are taken into consideration. If you have fewer than 35 years in Social Security-covered employment, zeros will be used to fill in the empty spots.
These annual indexed amounts are averaged together and divided by 12 to calculate your average indexed monthly earnings, or AIME.
Your AIME is then applied to a formula to determine your primary insurance amount, or your initial monthly benefit if you retire at exactly your full retirement age. For 2019, this formula is 90% of the first $926 in AIME, 32% of the amount between $926 and $5,583, and 15% of the amount greater than $5,583. However, you'll use the formula in effect in the year you turn 62, regardless of when you actually claim benefits. The percentages don't change, but the AIME thresholds (known as "bend points") do. You can find historical bend points on the Social Security Administration's website.
Finally, if you don't claim Social Security at your exact full retirement age, your benefit will be permanently adjusted up or down for delayed or early retirement, respectively.
If you retire in 2019 with a $100,000 average salary
With that in mind, let's take a look at how much you could expect from Social Security if you retire in 2019 with 35 years of earnings that average an inflation-adjusted $100,000. We'll look at three examples -- if you claim Social Security as early as possible (age 62), right on time (age 66), or as late as possible (age 70).
If you claim Social Security at 62 in 2019, you'll use the 2019 benefit formula that I outlined in the previous section. A $100,000 income translates to an AIME of about $8,333, so this would produce a primary insurance amount, or PIA, of $2,736. However, because the full retirement age for someone turning 62 in 2019 is 66 years and six months, the early retirement reduction would drop your monthly benefit to $1,984.
Next, for people reaching full retirement age in 2019, it is still defined as 66 years old. Recall that the formula used in this case is the 2015 version -- when people turning 66 in 2019 reached age 62. Applying this to the formula with bend points of $826 and $4,980, respectively, produces a PIA of $2,576. Because you're claiming at your exact full retirement age, this would be your initial monthly benefit.
Finally, if you claim Social Security at 70 in 2019, you'll use the 2011 formula when computing your PIA, which has bend points of $749 and $4,517, respectively. Using a $100,000 average income produces a PIA of $2,452. However, because you waited four full years past your full retirement age to claim benefits, your benefit is permanently increased by 32%, giving you an initial monthly benefit of $3,237.
What if you're still a few years away?
Because Social Security benefits generally increase with inflation, even if you are still years away from Social Security, these calculations should give you a pretty good idea (in today's dollars) of how much you can expect from Social Security.
Having said that, it's important to keep in mind that Social Security is currently not financially stable for the long term, so it's likely that there will be some type of reform package at some point in the not-too-distant future. And while this doesn't necessarily mean the way Social Security is calculated will change, it's certainly a possibility.
