Social Security Has Made It Clear: You'll Need More Than Just Your Benefits

I never shy away from calling Social Security one of the U.S.’s most important social programs. For decades, it has kept retirees financially afloat, including many of the 54 million who are currently receiving retirement benefits.

One problem with Social Security, though, is the gap many retirees will experience between their benefit amount and their expenses. The width of this gap will vary, but millions will find themselves with one nonetheless. It’s a problem that the Social Security Administration (SSA) has made known itself.

How your Social Security benefit is calculated

Your baseline Social Security benefit is called your primary insurance amount, and it’s calculated using a formula that considers the 35 years when your income was the highest. Once your primary insurance amount is determined, your actual benefit will depend on when you claim relative to your full retirement age.

Claiming benefits before your full retirement age reduces them by 5/9 of 1% monthly for the first 36 months. Each additional month will further reduce them by 5/12 of 1%. This means your monthly benefit will be reduced between 6.66% and 30%, depending on when you claim.

Claiming benefits after your full retirement age increases them by 2/3 of 1% monthly (8% annually) until you reach age 70. This could mean an increase of up to 24% if your full retirement age is 67 and you delay until 70.

How much of a gap can you expect with Social Security?

There’s no straightforward “your Social Security benefits will be short this amount” number that applies to everyone. However, according to the SSA, if you claim benefits at your full retirement age, benefits replace about 79% of pre-retirement income for very low earners, about 43% for medium earners, and about 28% for maximum earners.

A good baseline is to aim for 80% of your pre-retirement income to be available in retirement. This includes your savings, investments, and Social Security benefits. For example, if you made $100,000 annually before retirement, you’d ideally have $80,000 available in retirement. This would work out to around $6,666 monthly.

For perspective, the average benefit for someone age 70 was $2,275 at the end of last year, around 34% of the “ideal” amount someone should have available monthly if they earned $100,000 leading into retirement. If someone earned $50,000 heading into retirement, they’d ideally have $40,000 available ($3,333 monthly). This means that, at 70, receiving the average benefit ($2,275) would cover just over 68% of their “ideal” income.

Again, how much someone needs or receives will vary widely, so don’t take these examples as gospel. However, the larger point is that most people will indeed have a gap, reaffirming the importance of having multiple sources of retirement income. Ideally, your Social Security benefits can be an added bonus, not what you rely on.