social security payout

Social Security (3 of 3) – How Much Will I Get?

Most people don’t pay any attention to what their Social Security payout will be until they’re about to retire. That’s insane. You have an account that takes 7.65% of every paycheck and you’re not going to check on it for 45 years??? Good thing you’re not most people.

First up, go to ssa.gov and set up an account. It works in the same way every other website works so…

I assume you accomplished that with no issues. Let’s look at the site!

SSA.GOV

There are two major components that concern working adults: “Estimated Benefits” and “Earnings Record”.

social security payout
Screenshot from my SSA homepage

The first thing to look for is accuracy. Is your earnings record correct? If it isn’t there are ways to dispute it, but essentially you’ll need a copy of your W-2 for the year in dispute. So obviously if you were to wait 40 years to check your account only to find it got messed up when your last name changed… well good luck sorting that out.

social security payout

The earnings in each year should tie to Box 3 – Social Security Wages on your W-2. It’s a good idea to login to SSA.GOV every year when preparing your tax return just to make sure your current year earnings match.

Eligibility

In order to be eligible for Social Security benefits you need 40 credits. Credits are the SSA’s way of making sure you’ve worked enough to earn benefits. You earn 1 credit for every $1,320 of wages, but you can only earn up to 4 credits in a single calendar year. This means you have to work at least 10 years before you can qualify to receive any money from social security.

The $1,320 of wages is adjusted every year, so next year it will be slightly higher, and in previous years it was slightly lower.

Once you hit 40 credits you qualify for retirement benefits at age 67, Medicare at age 65, and disability benefits at any age you become disabled. You can actually qualify for disability benefits a bit sooner, but it’s slightly more involved; if you’re curious you can read the details here.

social security payout
I’ve already worked enough (40 credits) to qualify for Medicare
social security payout
Hey look at that, qualify for disability benefits too
Social Security payout
And last but not least, I’ve worked enough to qualify for Retirement benefits. You should ignore the $2,722 monthly estimated benefit, it assumes I’ll work until I’m 67 (spoiler alert – not gonna happen)

The SSA website only tells you an estimate of your monthly benefit, not what you’ve actually earned. They assume you’ll work your whole life, earning the same salary all the while. So how do you calculate the amount you’re eligible for if you walked away today? Great question! Let’s take a look.

Simplified Version of the Monthly Benefit Calculation:

See the charts below for my personal monthly benefit calculation

  • Find your AIME (Average Indexed Monthly Earnings)
    1. Add your highest 35 years of inflation adjusted earnings then divide by 420 (the # of months in 35 years)
      1. If you don’t have 35 years of earnings history, add all the years you do have, but still divide by 420.
      2. My AIME is $1,494.32 ($627,616/420)
  • Your monthly benefit is based on your AIME. The calculation is tiered, and your total benefit will be the sum of the following
    1. 90% of the first $826
    2. 32% of $827 – $4,980
    3. 15% of >$4,980
  • My benefit earned so far is $957.26.
    1. (.90 x $826) + (($1,494.32 – $826) x .32) = $957.26
    2. If I quit working at the end of this year, and I never work again, starting at age 67 I will be eligible for a $957.26 monthly benefit, which is just under $11,500/year. Not bad.

My Personal Monthly Benefit Calculation

social security payoutSocial Security Payout

 

 

 

 

 

 

Why is the Benefit Tiered?

If you look again at the third bullet point you’ll notice the payout is heavily weighted toward your early earnings. Maybe you already know why… In the government’s effort to prevent destitution, taxes are manipulated to provide greater benefit to the lowest income earners at the expense of higher income earners. It’s the same with the income tax, people at the poverty level pay 0% income tax, while the highest income earners pay >40%.

Basically the tiered social security payout is ensuring people with lower incomes receive the maximum amount of benefit proportional to what they pay in. This maximum benefit is subsidized by high income earners, who are only getting 15% of their AIME > $4,980.

It’s a progressive tax with a two-prong approach to increasing the size of the middle class: (1) lift impoverished people up and (2) pull rich people down. Classic taxes.

To date, my $593,660 in lifetime pay has earned $957 in monthly Social Security benefits. Because of the tiered system, the next $593,660 I’m paid will only earn $478 in benefits – womps.

Who are the “High Income Earners” in the Top Tier?

To reach the 15% tier you need an AIME of $4,980, which is achieved with lifetime inflation adjusted earnings of $2,091,600. That would take an average salary of $59,760 over 35 years. Which brings me to another part of the benefit calculation, social security is based on a maximum of 35 years of earnings. So if you work more than 35 years, you will have earnings that don’t count toward your retirement, let’s look at another example:

Hypothetical Example

You start work right after college (age 24) as an accountant making $50,000/year. You don’t put forth any effort, so you never receive any raises except for cost of living adjustments. If you work until full retirement age (67), you will have put in 43 years and made $2.15M over your lifetime.

Even though you paid Social Security for 43 years, only 35 of them will count toward your AIME. Your AIME would be $4,167, entitling you to a monthly benefit of $1,812 or $21,744/year. The portfolio value required to support that withdrawal level is $543,600 (4% rule).

Remember that social security is on pace to only pay 75% of benefits earned, which changes the example figures to an annual benefit of $16,308 and a valuation of $407,700.

In the above scenario you will have paid $3,100/year in social security taxes over the course of 43 years. Your employer will have also paid the same amount on your behalf. Had you been able to invest the $6,200/year your balance at age 67 would be $872,259 (assuming 5% returns), which sort of dominates the $543,600 valuation of Social Security benefits.

Why the disparity? Because at $50,000/year you’re a rich person, though it probably doesn’t feel like it. The difference between what you paid in and what you’ll be getting back has subsidized the benefits of lesser earners.

Takeaways

Social security taxes are taking 6.2% of your paycheck, have some idea where your money is going! You can do so by signing up for a SSA.GOV account and checking your benefits. Please reach out if you have any questions 🙂

 

Social Security (1 of 3) – Why?

Social Security (2 of 3) – I Heard it’s Broke

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