Social Security is a useful supplement to your personal retirement savings -- but that's all it was ever intended to be. If you're counting on Social Security to replace most or all of your pre-retirement income when you finally leave the workforce, you'll be sorely disappointed and wind up struggling to pay your bills at the end of your life.

You won't suffer this fate, because you are going to learn how to avoid going broke in retirement. We'll explain how your Social Security benefits are calculated and show you how to boost your benefit checks. We'll also explain how much of your income you can expect Social Security to cover and show you how important it is to contribute your own savings to personal retirement accounts. 

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How are Social Security benefits calculated?

We'll show you the short way and the long way to calculate your monthly checks. It's important to do the long way at least once, so you can understand the mechanics. After you walk through the long way once, then use the easier (read: online) way to check by creating a my Social Security account.

When you log on to your account, you will find out how much you can expect from Social Security based on your current work record. This amount is in today's dollars and doesn't account for the cost-of-living adjustments (COLAs) that the government makes each year to help counter inflation to some degree. These COLAs will increase the amount of your Social Security checks over time in an attempt to keep the value of these checks steady even as inflation drives up living costs.

Now, the long way. The formula for calculating your Social Security benefit is more complicated than most people realize.

First, you add up your income during the 35 most profitable years of your life, making adjustments for inflation according to this table. If you didn't work for at least 35 years, zeroes will be added to your calculation, which will significantly reduce your benefits, and if you worked for less than 10 years, you won't be eligible for Social Security benefits at all.

Once you have calculated your total income during your 35 highest-earning years, you divide this amount by 35 to get the annual average and then divide this by 12 to get your average indexed monthly earnings (AIME). From there, your basic Social Security benefit, or primary insurance amount, is calculated according to the following formula:

  1. Multiply the first $926 of your AIME by 90%.
  2. Multiply any amount over $926 but less than $5,583 by 32%.
  3. Multiply any amount over $5,583 by 15%.
  4. Lastly, add these amounts together.

This is the amount you will receive if you begin taking benefits at your full retirement age (66 or 67, depending on when you were born). Starting benefits early or delaying them will change the size of your checks and we'll explore this in more depth later on.

How much does Social Security cover?

According to the Social Security Administration, the program is only designed to replace about 40% of pre-retirement income for "average earners," though it offers no insights as to what constitutes average earnings. For low earners, this percentage may be higher and for high earners, it may be lower.

The average Social Security benefit check for retired workers is $1,461.31 as of December 2018. This amounts to just over $17,500 in a year. But annual expenditures in retirement for adults 65 and older are $49,572, according to the latest data from the Bureau of Labor Statistics. That leaves about $32,000 per year, or about 64% of the average retiree's living expenses, that they must cover on their own. And that amount could rise over time.

The future of Social Security

The above data is for someone on Social Security today, but the future will most likely look different.

In 2034, the trust funds that support Social Security will no longer be able to pay everyone their full benefits. At that point, the program will only be able to pay out about 79% of promised benefits to retirees and the disabled. That doesn't mean Social Security will go away, but the government needs to institute reforms in order to sustain it. No one knows what that reform will look like yet, but a few proposals include:

  • Reducing benefits
  • Raising the full retirement age (FRA)
  • Reducing COLAs
  • Raising the payroll Social Security tax rate (currently it is 12.4%, evenly split between employee and employer, unless you're self-employed)
  • Raising the ceiling on wages subject to Social Security tax (currently $132,900 in 2019)

Depending on which of these solutions are enacted, it's possible that the value of Social Security will decrease over time and it will not cover 40% of average retirees' living expenses anymore. Then, you'll have to rely even more upon your own retirement savings to make up the difference.

How to boost your Social Security checks

If you're concerned about having enough money in retirement, there are some things you can do to boost your Social Security checks.

The first is to work at least 35 years, and longer if you can. This will ensure that no zero-income years weigh down your benefit calculation. Also, your income will (hopefully) grow steadily higher as you progress throughout your career, increasing your average indexed monthly earnings (AIME), which in turns means larger benefit checks. Anything you can do to raise your income today, like pursuing promotions or working overtime, will also help to increase your benefit by raising your AIME.

Think carefully about when to start taking your Social Security benefits, too.

If you wait until your full retirement age (FRA), you'll receive 100% of your scheduled benefit, per the calculations outlined above. You can start Social Security as early as 62, but then you will only get 70% or 75% of your scheduled benefit, depending on your full retirement age.

The government reduces the amount you receive per check by 2/3 of 1% per month for every month you start taking benefits before your FRA. It's also possible to delay Social Security past your FRA in order to increase the size of your benefit checks even more. The effective bonus for waiting maxes out at age 70, when you'll receive 124% of your benefit per check if your full retirement age is 67 or 132% if your full retirement age is 66. Of course, not everyone can afford to delay taking their benefits just to enjoy the bigger checks.

No matter what you do, Social Security is never going to cover all of your expenses in retirement. But by planning ahead and contributing as much as you can to your personal retirement accounts, this shouldn't threaten your financial security.