For high-income earners, understanding how Social Security benefits are calculated is an essential ingredient in successful retirement planning. If you make $120,000 a year, several factors will come into play in determining how much Social Security you can get one day: your earnings history, the age at which you want to start taking your benefits, and the different formulas that are utilized by the SSA.
Eligibility for Social Security benefits
You must pay into the system for at least 40 calendar quarters, thus working at least 10 years to be qualified, to gain Social Security retirement benefits. The level of your benefit is related to your average indexed monthly earnings over the 35-year period with your highest earnings at that point. Note that the SSA has a maximum taxable earnings cap, beyond which a person’s income is not subjected to Social Security taxes for that particular year. For the year 2024, this cap sits at $160,200. Anything over this limit is not counted toward benefits.
Calculating your Primary Insurance Amount (PIA)
The SSA takes your average indexed monthly earnings (AIME) and, via a formula, converts it into your Primary insurance amount (PIA)-the benefit you’d receive at full retirement age. That formula changes the percent applied to different portions of your AIME. Those portions are determined by “bend points,” which change annually. For 2024, the PIA formula is:
90% of the first $1,115 of AIME, plus
32% of AIME over $1,115 and up to $6,721, plus
15% of AIME above $6,721.
Because your annual income is $120,000, which is less than the 2024 taxable maximum of $160,200, all of your salary is subject to Social Security taxes and is in the benefit calculation.
Impact of claiming age on benefits
The age at which you decide to begin receiving your Social Security benefits has a great impact on how much you receive:
- Early Retirement, Age 62: Filing at age 62 makes one eligible for reduced benefits, as the claimant will be receiving benefits over a longer period.
- Full Retirement Age (About Age 66-67): You will get 100% of your PIA by claiming at your full retirement age (FRA).
- Delayed Retirement to Age 70: For every year beyond full retirement age, your month-to-month check will be increased because of delayed retirement credits to a maximum at age 70.
For instance, if your PIA at your FRA comes to $4,776 per month, claiming at age:
- Age 62 would cut your benefit to some $3,583 monthly.
- Age 70 may up your benefit to some $6,300 monthly.
These numbers are for illustration only; in fact, the benefits depend on the person’s real earnings history and his or her actual FRA.
Cost-of-Living Adjustments (COLA)
COLA index Benefits of Social Security each year for inflation. In 2025, there will be a 2.5 percent COLA that would hike the benefits by that percent. Using the example above, with a 2.5 percent COLA, $4,776 a month would become about $4,895.
Taxation of Social Security benefits
Social Security benefits may be subject to federal income taxes, depending on your combined income. For individuals with significant additional income, up to 85% of benefits may be taxable. It’s advisable to consult with a tax professional to understand the implications for your situation.
Planning for retirement
While Social Security does form the foundation for your retirement income, it alone almost never is sufficient to enable one to maintain a pre-retirement standard of living. Financial experts say personal savings, investments, and other retirement accounts are superior methods of supplementing Social Security.
