Social Security is often the largest source of income in retirement, and nearly 90% of retirees depend on benefits to some degree. But knowledge gaps regarding the program are prevalent among adults, which calls into question their ability to plan for retirement.
For instance, a recent survey from Nationwide Retirement Institute found that more than 40% of adults are unsure how much income they will receive from Social Security, and more than 90% do not know how to maximize their payouts.
Read on to learn how Social Security benefits are calculated, and to see how much benefit income retirees can expect at three hypothetical earnings levels.
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How Social Security benefits are calculated for retirees
Social Security payouts vary greatly among retired workers. Discrepancies in benefits are brought on by differences in four variables: work history, lifetime earnings, full retirement age (FRA), and claiming age.
The first and second variables influence the primary insurance amount (PIA). Specifically, the Social Security benefits formula is applied to the inflation-adjusted earnings from the 35 highest-paid years of work to calculate the PIA, which is the benefit a retired worker would receive if they started Social Security at their FRA.
The third and fourth variables determine the impact of early or delayed retirement. Specifically, workers who collect Social Security before their FRA receive smaller benefits, meaning they get less than 100% of their PIAs. The reduction is greatest at age 62, simply because that is the earliest age at which a worker can claim retirement benefits.
Likewise, workers who claim Social Security after their FRA receive a bigger benefit, meaning they get more than 100% of their PIA. The increase is most profound at age 70. Delayed retirement credits stop accumulating beyond that point, so it never makes sense to claim any later.
How much Social Security income retirees can expect
The Social Security Administration publishes an annual analysis of Social Security replacement rates. The latest report defines three hypothetical workers based on career-average earnings in 2023 dollars, as detailed below:
- Low earnings: $28,561
- Medium earnings: $63,469
- High earnings: $101,550
Assuming Social Security begins at FRA, benefits would replace 57% of pre-retirement income for workers with low earnings, 42% of pre-retirement income for workers with medium earnings, and 35% of pre-retirement income for workers with high earnings. The annual Social Security benefit for each hypothetical worker is detailed below:
- Low earnings: $16,623 ($1,385 per month)
- Medium earnings: $27,466 ($2,288 per month)
- High earnings: $36,283 ($3,023 per month)
The chart below shows that same benefit information for the three hypothetical workers at their FRA, but it also illustrates how much lower payouts would be if Social Security started at age 62 or age 65. For context, workers reaching their FRA in 2023 were born in either 1956 or 1957, so FRA is defined as either 66 years and 4 months or 66 years and 6 months, respectively.
Chart by Author.
To summarize, Social Security benefits typically replace about 40% of pre-retirement income, but only for workers with average earnings, and only if Social Security starts at FRA. The replacement rate would be lower for workers with higher earnings, and higher for workers with lower earnings. The replacement rate would also be lower for workers who start Social Security before their FRA, and higher for workers that delay Social Security beyond their FRA.
That last point is particularly important. Workers have a great deal of control over when they claim Social Security, and claiming age can have a profound impact on payments. For instance, a worker born in 1960 would increase their benefit 43% if they claimed Social Security at their FRA as opposed to age 62, and that same worker would increase their benefit 77% if they claimed Social Security at age 70 as compared to age 62.
Readers interested in a precise estimate of their future Social Security benefits should make a my Social Security account through the Social Security Administration.
