Social Security benefits are based on your lifetime earnings. Specifically, your Social Security benefit is calculated using the 35 years in which you earned the most. So even if you make $75,000 right now, your eventual Social Security benefit will depend on your earnings over your entire career.
How Social Security Benefits are Calculated
First, the Social Security Administration (SSA) calculates your average indexed monthly earnings (AIME). This is done by:
- Adjusting or “indexing” your earnings to account for changes in average wages since the year the earnings were received.
- Selecting your highest 35 years of indexed earnings.
- Totaling those earnings and dividing by 420 months (35 years x 12 months per year) to get your AIME.
Second, the SSA applies a formula to your AIME to arrive at your primary insurance amount (PIA). This is the amount you would receive if you start collecting benefits at your full retirement age.
The PIA formula for 2023 is:
- 90% of the first $1,024 of your AIME
- Plus 32% of the AIME between $1,024 and $6,172
- Plus 15% of AIME above $6,172
If your AIME is $4,500, for example, you would calculate your PIA as follows:
- 90% of $1,024 = $921.60
- 32% of $3,476 ($4,500 – $1,024) = $1,112.32
- For a total of $921.60 + $1,112.32 = $2,033.92
So in this example, the PIA is $2,033.92.
How Your Benefit is Affected by the Age You Claim
You don’t have to wait until your full retirement age to start collecting Social Security. You can claim benefits as early as age 62. However, taking benefits before your full retirement age results in a permanently reduced benefit.
Specifically, your monthly benefit is reduced by:
- 30% if you claim at age 62
- 25% if you claim at age 63
- 20% if you claim at age 64
- 13.3% if you claim at age 65
- 6.7% if you claim at age 66
Conversely, you can delay taking benefits past your full retirement age, up until age 70, and receive a higher monthly benefit, including a delayed retirement credit of 8% per year.
How Your Current Earnings Affect Your Social Security Benefit
If you start taking Social Security benefits before your full retirement age while still working, your benefits may be temporarily reduced if your income exceeds certain thresholds. This is known as the retirement earnings test.
In 2023, if you are under full retirement age the entire year, $1 in benefits will be deducted for every $2 you earn above $21,240. In the year you reach full retirement age, $1 in benefits is deducted for every $3 you earn above $56,520 until the month you reach full retirement age.
However, your benefit will be recalculated at full retirement age to account for the withheld benefits. So ultimately your Social Security income will be unaffected by the retirement earnings test.
Estimating Your Social Security Benefit
The closer you are to retirement, the more accurately the SSA can estimate your future Social Security benefit. Starting at age 60, you can view your Social Security statement online, which will provide an estimate of your benefit amount based on your actual earnings to date.
To receive a personalized estimate, you can create an account on the SSA website and use their Retirement Estimator tool. You will need to provide your date of birth and estimated future earnings.
The Retirement Estimator will show how your estimated benefit changes depending on the age you claim benefits. This allows you to make an informed decision about when to start taking benefits based on your individual situation.
General Estimates Based on a $75,000 Salary
While your actual Social Security benefit can only be estimated with your full earnings history, we can provide some general estimates for examples with a current salary of $75,000.
Let’s assume this person was consistently earning around $75,000 over their career adjusted for historical wage indexing. Their AIME would be around $6,250 per month.
Applying the PIA formula for 2023:
- 90% of $1,024 = $921.60
- 32% of $5,226 ($6,250 – $1,024) = $1,672.32
- For a total of $921.60 + $1,672.32 = $2,593.92
So this person’s estimated PIA is $2,593.92 per month or $31,127 annually. This is the benefit they can expect if claiming at their full retirement age.
Now let’s look at how much they would receive if claiming at different ages:
| Age Claiming Benefits | Reduction Factor | Monthly Benefit | Annual Benefit |
|---|---|---|---|
| 62 | 30% reduction | $1,815.74 | $21,788.88 |
| 63 | 25% reduction | $1,945.44 | $23,345.28 |
| 64 | 20% reduction | $2,075.14 | $24,901.68 |
| 65 | 13.3% reduction | $2,251.68 | $27,020.16 |
| 66 | 6.7% reduction | $2,417.04 | $29,004.48 |
| 67 (full retirement age) | No reduction | $2,593.92 | $31,127.04 |
| 70 | Delayed credits | $3,143.09 | $37,717.08 |
As you can see, claiming early at age 62 would result in a much smaller monthly benefit compared to waiting until full retirement age at 67. And delaying until age 70 provides a 24% boost in benefits.
Other Factors That May Impact Your Benefit Amount
In addition to your age when claiming and earnings history, there are a few other important factors that affect your Social Security benefit amount:
- Time in the workforce – Having at least 35 years of earnings will ensure your benefit is not reduced for zero or low earnings periods. If you have less than 35 years, zero income years will be factored in, resulting in a lower average lifetime earnings.
- Marital status – If you are married, you can either claim benefits on your own record or receive up to 50% of your spouse’s benefits, whichever is higher. Divorce can also impact benefits if the marriage lasted over 10 years.
- Government pension – If you receive a pension from employment not covered by Social Security, such as federal civil service, your Social Security benefits may be reduced by the Windfall Elimination Provision or Government Pension Offset.
- Taxes – If your income from all sources exceeds certain thresholds, up to 85% of your Social Security benefits may be subject to federal income tax.
It’s always a good idea to periodically review your Social Security statement and use their online tools to get an updated estimate. This will account for any life or career changes that may impact your future benefit amount.
How $75,000 in Income Impacts Social Security Taxation
In addition to receiving Social Security benefits, you also must pay Social Security taxes on your income when you are working. For 2023, you pay 6.2% on earnings up to $160,200.
If you have an income of $75,000 as an employee, you will pay $4,650 in Social Security tax ($75,000 x 6.2%). Your employer will also pay a matching 6.2% tax on your behalf.
Once you start receiving Social Security benefits, you may have to pay taxes on your benefits if your provisional income exceeds certain thresholds. For single filers, this provisional income includes:
- Your adjusted gross income
- Nontaxable interest
- Half of your annual Social Security benefits
For 2023, if your provisional income is between $25,000 and $34,000 as a single filer, you may have to pay tax on up to 50% of your Social Security benefits. Above $34,000, up to 85% of your benefits may be taxed.
With an income of $75,000 and assuming half of the median annual Social Security benefit of $16,000, your provisional income would be $91,000. So you would likely pay income tax on up to 85% of your Social Security benefits.
Maximizing Your Social Security Benefit on a $75,000 Income
Here are some tips to help maximize your Social Security income with $75,000 in current earnings:
- Continue working at least 35 years to avoid zero or low income years reducing your average lifetime earnings.
- Consider working beyond age 62 before claiming if you have no reductions to your benefit by the earnings test.
- Claim benefits strategically – delaying even just one year from 62 to 63 can boost your monthly check by 5-8%.
- Coordinate with your spouse on when each of you claims to maximize household benefits.
- Plan for taxes – up to 85% of benefits may be taxed, so budget accordingly.
- Speak to a financial advisor about how to optimize Social Security in the context of your overall retirement plan.
Making smart Social Security decisions and using online tools to estimate your benefits can help you get the most out of the program given your work history and expected retirement lifestyle needs.
Conclusion
Your Social Security benefit depends on your lifetime earnings, not just your income in a single year. With a current salary of $75,000, you would likely qualify for over $2,500 per month in benefits if you claim at full retirement age.
Claiming before or after full retirement age can significantly raise or lower your monthly payment. And taxes will likely apply to your benefits if your overall income exceeds $25,000 as a single filer.
To maximize your Social Security income, work at least 35 years, consider your claiming age carefully, coordinate benefits with your spouse, and plan for the taxes you’ll owe on your benefits.
Social Security is an important source of guaranteed income in retirement. Making informed decisions and using the SSA’s online tools can help ensure you receive the full benefits you’ve earned over your working life.