With the broad range of options to consider with Social Security retirement benefits I know a lot of folks are wondering how much income they can expect from the program. The reality is that Social Security was designed primarily to safeguard lower income classes from not having enough retirement income. So even though most of us receive benefits, those with lower lifetime earnings get a higher percentage of their previous income covered.
This tiered structure of benefits is calculated within the benefits formula through the use of bend points. In short, each bend point pays out a different percentage of average monthly income. Higher levels of earnings do receive more benefits, but the percentage of the benefit declines. The earnings levels where percentages change are called “bend points” because a graph of the benefits would have a bend in the line at those points.
The bend points formula provides 90% of average monthly income to the first bend point, 32% from there up to the second bend point, and 15% above the second bend point. Bend points are adjusted each year for inflation. For 2014 these portions are the first $816, the amount between $817 and $4,917, and the amount over $4,917.
So what does this all mean? Well, a single individual who earned an average of $816 per month over their lifetime would receive a monthly check for $734.40 at full retirement age. This amount represents 90% of the income they earned on average over the past 35 years.
In contrast, a single person who averaged $4000 per month in earnings would receive a monthly benefit check for $1,753.20. This amount represents the same $734.40 as the first worker plus an additional $1,018.80 from the second bend point (32% of $3,184). By the end, only 43% of this individual’s income will be replaced with Social Security.
Recognizing that the Social Security formula replaces less income for higher wage workers is important part of planning for retirement. If you want to sustain an income level close to what you had during your career then you will likely need to rely on more than Social Security to reach this goal.