Social Security benefits in the United States aren't well-understood by many pre-retirees. The benefit formula is a bit complex, and many people simply don't have any idea how much they should expect to get.
To look at one example, let's say that you make $100,000 per year. Here's a rundown of what this means in the context of the Social Security formula, as well as an estimate of how much you could expect to receive when you claim your own retirement benefit.
There's not an easy answer
To be fair, there's no one-size-fits-all answer to the question of how much you'll get from Social Security benefits if you make $100,000. Someone who earns $100,000 per year for their entire career would get a different Social Security benefit than someone who earned $100,000 for a few years but generally had a lower income throughout their working lifetime.
Without getting too deep into the Social Security formula, here's a bit more color. Your Social Security benefit is based on the following factors:
- Your 35 highest years of earned income, indexed for inflation, up to each year's wage base limit. This is the reason why it's so hard to say what your Social Security benefit will be if you make $100,000 now.
- The age at which you claim Social Security. Depending on when you were born, full retirement age is between 66 and 67 years old. However, you can claim Social Security at any point between the ages of 62 and 70, and the earlier you claim, the lower your benefit will be.
- The Social Security benefit formula in effect in the year you first become eligible for Social Security (when you turn 62), not the year you actually decide to claim your benefit.
If you're a lifetime $100,000 earner
With that in mind, let's take a look at how much someone who earned an average of $100,000 per year (in 2020 dollars) throughout their career could expect from Social Security.
The Social Security Administration (SSA) takes an inflation-adjusted average of your 35 highest years and divides it by 12 to calculate your average indexed monthly earnings, or AIME. If you averaged $100,000 per year, your AIME would be $8,333.
For 2020, the Social Security benefit formula is:
- 90% of the first $960 in AIME
- 32% of the amount greater than $960 but less than $5,785
- 15% of the amount greater than $5,785
Applying these percentages and thresholds (known as "bend points") to an AIME of $8,333, you'd get a monthly Social Security benefit of $2,790. If you turn 62 in 2020, your full retirement age is 66 years and eight months old.
However, keep in mind that this assumes you claim your Social Security benefit at your exact full retirement age. If you claim early, your benefit will be permanently reduced by 6.67% for each year early (up to 36 months) and 5% for each additional year, up to as early as 62. If you claim after full retirement age, your benefit will be permanently increased by 8% for each year you choose to wait, until as long as age 70.
Of course, this is a simplified example. There are a few things to keep in mind that could result in a higher or lower monthly benefit:
- This example is based on the 2020 benefit formula, which will only apply to all Americans who turn 62 this year. If you turn 62 in any other year, your benefit calculation method will be slightly different (but it should be close).
- If you worked for less than 35 years, zeros will be used in the calculation of your lifetime average. In other words, if you earn an average of $100,000 for 30 years and then retire, your Social Security benefit will be substantially lower.
Will Social Security be enough?
Based on our calculation of a $2,790 Social Security benefit, this means that someone who averages a $100,000 salary throughout their career can expect Social Security to provide $33,480 in annual income if they claim at full retirement age. This means that Social Security would replace just over one-third of their preretirement income, which is not even close to the 70% to 80% of your salary that most financial planners suggest in order to maintain the same quality of life.
In a nutshell, Social Security is not likely to be enough to retire comfortably all by itself. This is especially true for higher earners, since the benefit formula is weighted in favor of lower-income workers.