Will Social Security Be Enough in Retirement?

Will Social Security be enough in retirement? The answer is probably not. Social Security is designed to replace only a percentage of your income, not all your income.  

How the Monthly Social Security Benefit is Determined 

Let’s see how Social Security determines your monthly Social Security Benefit Amount to learn why Social Security alone will probably not be enough in retirement. 

First, they need to calculate your Average Indexed Monthly Earnings. 

They take the top 35 years of earnings, after adjusting for inflation. Then they divide it down to your average monthly earnings. 

Next, they need to calculate the Primary Insurance Amount, by applying different calculation percentages at three different bend points. 

Roughly speaking, in 2023, the first $13,000 or so of your average annual earnings from that top 35 years you get about 90% of that back in your Social Security monthly amount. That’s a really high replacement rate, but it’s only the first $13,000 or so.  

The next $67,000 of average annual earnings you’re only going to get about 32% of that back.  

You can see that Social Security is not designed to replace all of your pre-retirement earnings. It’s designed to replace a portion to be a help.  

The next level from about $$80,000 to 160,000 for your average annual income is only going to pay back to you 15% of that.  

Above that $160,000, it’s at 0%. If you make more than $160,000 on average, you’re not getting back any Social Security payments for those earnings. 

That’s why it’s so important, especially the higher income you are, the more money you make, the more you’ve got to rely on yourself and your own savings to help you in your retirement years. 

Social Security is not designed to be enough in your retirement. 

How your Benefit Changes before and after your Full Retirement Age 

The other reason why Social Security is likely not to be enough in retirement is that your promised amount is promised at a certain age called your Full Retirement Age. If you’re like most people, who take their Social Security before their Full Retirement Age, you’ll receive a benefit age reduction. 

You could be getting 30% lower than your promised retirement amount, if you take your Social Security as early as 62! 

When you’re looking at Social Security, you can’t rely totally on Social Security for your retirement income. The more money they make, the more you need to save for retirement, so you’ll have enough money for your retirement later in life.