For those making the median income in the U.S., this shows an example of what you might expect from Social Security.
Most Americans count on Social Security to pay them valuable retirement benefits to make ends meet after their careers end. With inflation ravaging household budgets and earnings under pressure in many areas, Social Security is a more valuable safety net than ever.
Median household income is close to $75,000, according to figures from the Census Bureau. Having a sense of how much someone making $75,000 can expect to get from Social Security after they retire is an important part of your overall retirement planning. Here are the details on what numbers the Social Security Administration will look at in determining what you'll get from the program.
How much will you pay in Social Security taxes?
To be fair, most people feel like they've earned the Social Security benefits they receive because they pay Social Security payroll taxes throughout their careers. If you're an employee earning $75,000 a year, you'll pay 6.2% through taxes withheld from your paychecks. That amounts to $4,650 per year.
In addition, your employer will pay a matching $4,650 on your behalf. If you're self-employed, you'll pay the combined amount of $9,300.
Will you qualify for Social Security?
Many people don't realize that you must have a long enough work history to qualify for retirement benefits from Social Security. Those making $75,000 a year easily qualify for the maximum of four Social Security work credits each year. To get full benefits, you'll just need to work 10 years at that wage and earn the needed 40 total credits.
What does Social Security look at to figure out your monthly check?
The Social Security Administration looks at a 35-year work history in determining the size of your benefit. If you work longer than that, your lowest-earning years after adjusting for inflation get discarded. Work a shorter career, and you get zeros added to your work history, lowering your overall average earnings.
Bear in mind that Social Security gives equal weight to your earnings from every year of your career. So, don't get the idea that earning $75,000 for a year or two will automatically get you a much bigger monthly benefit. That's not how it works, in contrast to some private pension payments.
What will Social Security pay you when you retire?
The exact calculation of how much you'll get from Social Security depends on many variables. However, assuming you made an inflation-adjusted $75,000 every year for 35 years, your average monthly earnings would be $6,250. For those who become eligible for benefits in 2023, that means:
- You'll get 90% of the first $1,115 in average indexed monthly earnings. That works out to $1,003.50.
- Then, you'll get 32% of the amount up to $6,721 per month. In this example, that takes care of the remaining $5,135, and 32% of that amount is $1,643.20.
- Add those two figures together, and you'll get $2,646.70 per month.
That number gives you what you'll receive if you wait until your full retirement age to claim your benefits, which is 67 for most people nearing retirement right now. If you intend to claim at the earliest possible age of 62, you'll need to adjust that figure downward to reflect the early claiming penalty. For someone with a full retirement age of 67, claiming at 62 will cut your payment by 30%, bringing it down to $1,852.70 in this example.
On the other hand, if you wait until after full retirement age to claim your Social Security retired-worker benefit, you can get an extra 8% for every year you wait. That bonus stops at age 70, but you could still get a 24% boost by waiting, bringing your monthly total to $3,281.90.
Don't dismiss Social Security
It's easy to downplay the importance of Social Security, but look how much that check means -- $2,646.70 is more than 40% of your pre-retirement monthly pay. That won't completely replace your old income, but it does make it easier to save enough in your retirement accounts to cover the gap.
