There are a lot of variables that go into planning for retirement in the United States. Beyond traditional retirement savings vehicles like 401(k)s and IRAs, there are also many personal and individual factors that can drastically change what your retirement looks like. One major piece is Social Security. Many individuals planning for or beginning to enter retirement ask the question: “How does Social Security actually calculate my monthly benefit check?” In this blog I will dive into how Social Security works and what it means for how much you will need to save on your own to see if you’re on track for the retirement you actually want.
So how does Social Security actually work? First let’s start with the basics: It’s your highest 35 years of earnings (adjusted for wage growth over time) and averages them into one monthly number. If you worked fewer than 35 years, the missing years count as zero, which drags the average down. That number is then run through a progressive formula to determine your benefit amount at full retirement age.
The formula has two “bend points”. For 2026 the first $1,286 of your average monthly earnings is replaced at 90%, the amount from $1,286 to $7,749 is replaced at 32%, and anything above $7,749 is replaced at just 15%. So, it intentionally replaces a much bigger share of income for lower earners. Here an example with two workers:
Maria earned roughly $40,000/year over 35 years. Her average is about $3,333/month
Bend points:
- First $1,286 x 90% = $1,157
- Next $2,047 x 32% = $655
Monthly benefit: about $1,812
James earned about $144,000/year over 35 years. His average amount is $12,000/month
Bend points:
- First $1,286 x 90% = $1,157
- Next $6,463 x 32% = $2,068
- Remaining $4,251 x 15% = $638
Monthly benefit: about $3,863
These “bend points” are what make the formula progressive. The key take away is James earned 3.6 times more than Maria, but his benefit is only 2.1 times larger. Maria’s monthly checks will replace about 54% of her average monthly earnings, while James’ monthly check will only replace about 32% of what he was making.
So, what does this mean for your savings while working? The higher your income, the larger the gap Social Security leaves, and the more you’ll need to fund your retirement lifestyle through 401(k) and other savings. Social Security replaces a meaningful share of income for lower earners, but only a small portion for higher earners.
This is why there’s no true rule-of-thumb savings rate for retirement. Every individual and couple is different. Most people don’t plan to have a lifestyle cut when they retire, and it’s typically harder for a couple who has lived at a certain income level for 10,15, or 20 years to live off less. If anything, you’ll likely want to spend earlier in retirement on travel, home remodels, and new hobbies. Higher earners often need to save more because of the higher living expenses they’re accustomed to.
This is where planning and an advisor can add value. Building a savings plan that goes beyond your employer plan. Employer plans have annual contribution limits, and many people think, “I’ve maxed out my 401(k) this year,” and stop there. While that’s a good start, depending on your income, Social Security won’t replace what you’re making today, and you need to save more. This is where additional savings vehicles like IRAs and taxable brokerage accounts can help fill that gap once you’ve hit your 401(k) limit.
Social Security is a foundation, but not a full retirement plan. The math behind the benefit calculation isn’t talked about enough, and it can be hard to understand. As advisors, our job is to help people see these nuances so they can plan with a clear picture. Building a retirement plan isn’t easy and takes time, but understanding where Social Security fits in your own plan is a good place to start.