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Social Security is designed to provide you with some financial support when you retire, but on its own it won’t allow you to maintain the standard of living you had while working. Typically, the “replacement rate” — the term for how much of your working income your retirement benefit will make up — is around 40 percent.
However, that proportion can vary widely depending upon how much you earned during your working years. That’s because Social Security’s benefit calculation is progressive, meaning it provides proportionally higher benefits to lower-income workers.
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To calculate your benefit, Social Security determines your lifetime average monthly income, adjusted for historical changes in U.S. wages, and applies a formula that slices that monthly figure into three portions and gives the most weight to the lowest one. (The parameters change annually; for people who become eligible for retirement or disability benefits in 2023, the low portion is the first $1,115 of monthly average income.) The result is that the less you earned while working, the more of your income Social Security replaces.
In an June 2022 analysis, Social Security actuaries calculated the replacement rate for hypothetical retirees across a wide income range. For workers who claim benefits in 2023 at the age of 66 and 6 months — the full retirement age for people born in 1957 — they found that the replacement rate would be:
- 75.3 percent for someone with “very low” career earnings (defined as an average of $15,006 per year).
- 54.8 percent for someone with “low” average earnings ($27,011 per year).
- 40.7 percent for someone with “medium” average earnings ($60,024 per year).
- 33.6 percent for someone with “high” average earnings ($96,039 per year).
- 26.7 percent for someone with “maximum” average earnings ($147,775 per year).
Figures like these are a reminder that Social Security, while a crucial component in planning your financial future, provides a relatively modest measure of protection for most older Americans. Financial advisers generally recommend aiming to replace between 70 percent and 85 percent of what you were earning at the time you stopped working to maintain your lifestyle as a retiree.
That leaves a considerable gap most beneficiaries will need to tap other sources to fill, such as savings and investments. The AARP Retirement Calculator can help you plan ahead.
Keep in mind
- Your retirement benefit will be lower, and will replace less of your work income, if you start collecting it before reaching full retirement age. In the income examples noted above, replacement rates range from 20.6 percent to 58.4 percent for people who claim retirement benefits in 2023 at the minimum eligibility age of 62.
- In their latest annual report, Social Security’s trustees project that without changes in the program’s financial structure, its cash surplus will run out in 2035, after which it will be able to cover only about 80 percent of scheduled benefits. If that happens, income replacement rates would be lower still.