Written by Are you curious about how much social security you can expect to receive based on your salary? In this blog post, we will answer this question by breaking down the calculations step by step. Whether you earn $60,000, $80,000, $100,000 or $120,000 per year, we will show you how to estimate your social security benefits. Additionally, we will discuss the importance of calculating your benefits and provide essential information to help you plan for retirement.
Calculating Your Social Security Benefits
To calculate your social security benefits, there are a few factors to consider. First, you need to be of retirement age, which is 62 years old. Next, you’ll need to determine your average lifetime salary. This is calculated by taking your top 35 earning years and adjusting it for inflation. The Social Security Administration provides a cost-of-living adjustment (COLA) to help you with this calculation.
Once you have your average lifetime salary, you multiply it by 35. For example, if your average lifetime salary is $60,000 per year, your total would be $2.1 million. If it’s $80,000, your total would be $2.8 million. Similarly, a $100,000 average lifetime salary would give you $3.5 million, and $120,000 would result in $4.2 million.
Determining Your Average Index Monthly Earnings (AIME)
After calculating your total amount, the next step is to determine your Average Index Monthly Earnings (AIME). To do this, divide your total amount by 420. The number 420 is obtained by multiplying 35 (number of years worked) by 12 (months in a year).
For example, if your total amount is $2.1 million, your AIME would be $5,000 per month. If your total amount is $2.8 million, your AIME would be $6,667 per month. Similarly, a total amount of $3.5 million would result in an AIME of $8,333 per month, and $4.2 million would give you an AIME of $10,000 per month.
Understanding Social Security Bend Points
Now that you have your AIME, the next step is to understand the concept of Social Security Bend Points. Bend points determine the percentage of your income that you will receive as social security benefits. The formula is such that the less you earn, the higher the percentage of your income you receive in benefits. Alternatively, the more you earn, the lower the percentage.
Each year, the Social Security Administration sets the bend points. In 2024, the first bend point is $1,174, where you get to keep 90% of your AIME. For example, for an AIME of $5,000, you would keep $1,057 (90% of $1,174).
The second bend point is $7,078 per month. If your AIME is below this amount, you multiply the difference between your AIME and the first bend point by 32%. For example, if your AIME is $5,000, you would calculate $3,826 (difference between $5,000 and $1,174) and keep 32% of it, which equals $1,224.
However, if your AIME is above $7,078, any amount above this threshold is subject to a lower percentage of 15%. For instance, an AIME of $8,333 would result in keeping $1,889 (15% of $2,922, the difference between $8,333 and $7,078).
Estimating Your Social Security Benefits
To estimate your monthly social security benefits, you need to total the amounts at each bend point. This will give you an estimate of what you can expect to receive. Let’s look at a few examples:
- For an AIME of $5,000 per month, the estimated social security benefit payment would be $2,281.
- If your average annual income is $80,000, your estimated monthly social security benefit would be $2,814.
- For a $100,000 average annual income, your estimated benefit would be $3,134 per month.
- Finally, for an average annual income of $120,000, your estimated monthly benefit would be $3,384.
It’s important to note that as your income increases, the percentage of your salary replaced by social security decreases. For example, if you earn $60,000 per year, social security would replace 45% of your income. However, if you earn $120,000, social security would only replace 34% of your income. This reduction in benefits is primarily due to the lower percentage (15%) applied to the third bend point.
Plan for Your Retirement Income
While social security benefits are a valuable component of retirement income, it’s crucial not to rely solely on them. According to the Social Security Administration, the average retiree needs about 80% of their current income as their retirement income. This means that you need to make up the remaining 35% of your income through other sources.
Creating a well-rounded retirement plan that includes personal savings, investments, and possibly pensions will help ensure a comfortable retirement. Consult with a financial advisor to determine the best strategy for your individual circumstances.
Final Thoughts
Understanding how much social security you can expect to receive based on your salary is an essential step in planning for your retirement. By following the calculations outlined in this blog post, you can estimate your social security benefits accurately. Remember, while social security benefits are valuable, it’s essential to supplement them with other sources of income to achieve a comfortable retirement lifestyle.
Resources:
Benefit Formula Bend Points: https://www.ssa.gov/oact/cola/bendpoints.html
Cost-Of-Living Adjustments: https://www.ssa.gov/oact/cola/colaseries.html
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