How Much Will Social Security Replace?

A basic question all retirement savers need to ponder is: how much income will Social Security replace?

Conventional wisdom holds that retirees will need about 80% of their pre-retirement income in order to maintain their lifestyles. 1

For most, Social Security can be expected to provide a large chunk of that 80% — but just how much?

Some answers come from the The 2010 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Federal Disability Insurance Trust Funds. This is the annual report card for the Social Security system covering nearly 250 pages and packed with detailed charts, tables and financial statistics. One table in particular provides useful insights into the amount of pre-retirement you can expect Social Security to replace in the years ahead.

Pre-Retirement Earnings Level
Retirement at Normal Retirement Age
Retirement at Age 65
Lower Earner (Career-average earnings about 45 percent of the national average wage index (AWI), or about $19,388 in 2010.)
54% – 56%
49% – 52%
Medium Earner (Career-average earnings at about 100 percent of the AWI, or about $43,084 in 2010.)
40% – 42%
36% – 38%
Higher Earner (Career-average earnings at about 160 percent of the AWI, or about $68,934 in 2010.)
33% – 34%
30% – 32%

As you can see, Social Security can be expected to replace one-half or more of pre-retirement income for workers having relatively low earnings over the course of their careers. As career earnings increase, Social Security replaces a smaller portion of retirement income meaning that these workers need to rely more on 401k’s, other retirement savings and, increasingly more likely, continued employment in order to achieve the 80% replacement goal.


Notes:
  1. There is much debate over whether 80% overstates or understates income needs in retirement. One study by Georgia State University researchers shows needed replacement rates ranging from 78% for two-earner, higher income couples to 94% for two-earner, lower income couples. For this discussion, we can assume 80% is an overall accurate income replacement target. []

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