Replacing Income in Retirement

Replacing income in retirement creates a puzzle. Most of us will depend on two sources: Social Security and our savings. How much income you need from your savings depends on your Social Security. And, how much of your income Social Security replaces depends on how much you earn.

We’ll discuss how this fits together on today’s episode of Monday Morning Money.

Progressive Benefits

The more you earn the more your Social Security benefit will be—to a point. There is a maximum benefit. But it is a progressive benefit. Social Security replaces a larger percentage of income for lower earners.

Get A Copy of Your Social Security Benefit Statement.

To plan for your retirement, you need to have a good idea of what your Social Security benefits will be.  You can get a copy of your Earnings Record and Benefit Statement, by visiting the Social Security Administrations website.

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Video Transcript

Some estimate you need to replace between 70 and 80% of your household income in retirement. And for most of us that will come from two sources. Social Security and what we save.

So how does Social Security impact how much you need to save for retirement? Stick around we’ll talk about that next.

So how do we know we’ll only need seventy to eighty percent of our income in retirement?

While this is somewhat generalized, there is some merit to it. Some of the outlays you have while you’re working will not be there. For one, you’ll no longer be adding money to your 401(k) or other accounts. And many people will have a smaller income tax liability. You may also see some other work related expenses decrease.

We need to know how much is going to come from what source.

Replacing Income From Social Security

For the overwhelming majority of us, part of that income is going to come from Social Security. The Center for Policy basics estimates 97% of the people over 60 will receive Social Security. But how much can we depend on?

Social Security has a complicated formula. The more you make during your working years the higher your benefit will be, to a point. It does max out.

But Social Security retirement is a progressive benefit. If you make $50,000 per year, Social Security will replace a larger percentage of your income. If you make $150,000 per year, it will replace a smaller percentage.

Let’s show you what we mean, and keep in mind these are general examples

A couple who earns $50,000 per year has 53% of their income replaced by Social Security.

A couple who makes $100,000 will discover Social Security replaces 38% of their income.

And a couple with an income of $150,000 will have 27% of their income replaced by Social security.

As income levels increase, Social Security benefits replace a smaller percentage of income.

Replacing Income From Savings

The more you earn, the more important it is to save for retirement. Because your savings will have to do a lot more heavy lifting.

Let’s show you what we mean.

So if our income replacement target is 75%,

that couple who makes $50,000 , will need 22% of their retirement income to come from savings. If we use the 4% rule, That equates to about $275,000 in savings.

The couple who makes 100,000, will need 37% of their income from their nest egg. This means they need a nest egg of about $925,000.

And the couple who makes 150,000 will need their savings to replace half of of their income. This requires retirement savings of roughly 1.8 Million dollars.

This is a general example with certain assumptions about Social Security benefits. Real life will look different for most of us, but the general concept still applies.

The best thing you can do is get a copy of your Social Security Earnings record and benefit statement. This can improve how you plan for your future.