People who make $200,000 a year have plenty of financial resources to save for retirement, so one might think that Social Security plays almost no role in their retirement planning. Yet even though Social Security's progressive benefits structure replaces a smaller percentage of pre-retirement income for wealthy Americans than for low-income earners, the program is still a source of considerable income for high earners. Let's take a closer look at how much someone earning $200,000 per year can expect to receive from Social Security.
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What Social Security taxes cost high-income earners
Workers who earn $200,000 per year earn far above the wage base limit for Social Security, which for 2017 is set to rise to $127,200. In other words, workers who earn $127,000 or more will pay the maximum payroll tax of $7,886.40 in 2017, which is equal to 6.2% of the wage base limit amount. (Employers will pay an equal $7,886.40 on behalf of their high-earning employees.) From a practical perspective for someone in this situation, Social Security taxes will get taken out of paychecks until around mid-August, at which point the worker will reach the maximum limit and no further tax gets withheld.
Because you only pay Social Security taxes on amounts up to the wage base limit, not all of your earnings get counted in your work history. You'll be credited with the wage base maximum instead, following the rule that payroll taxes match up with work history earnings.
How much Social Security pays high-income earners
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It's rare for American workers to make more than the wage base limit for Social Security throughout their entire working lives. Typically, one will start out with more modest earnings, building up toward the upper income levels over the course of a career. Because the Social Security Administration looks at your earnings over the course of your 35 top-earning years, many people will have some of those early low-income years counted in their work history and therefore pull down average monthly earnings.
However, the Social Security Administration provides examples for high-income workers who have maximum taxable earnings throughout their careers. They'll result in slightly higher benefits than those who had lower-earning years in their work histories, but they still provide some guidance.
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How much you'll get depends in part on when you retire. A high earner who turns 62 in 2017 will have an average indexed monthly earnings of $9,784 per month. The SSA's benefit formula for someone retiring in 2017 takes 90% of the first $885 in monthly earnings, and then adds 32% of earnings between $885 and $5,336, plus 15% of the excess above $5,336. That produces a primary benefit amount of $2,888 per month. But if you retire at age 62, then your actual benefit falls by more than a quarter to $2,153 per month, because you'll be claiming Social Security before your full retirement age.
Because the wage-base maximums are different from year to year, those who turn 66 in 2017 have a different calculation. For them, average indexed monthly earnings are $8,843, and using the appropriate formula for the year in which those individuals first became eligible for benefits, the primary insurance amount is $2,687. That also happens to be what they'll get, because their full retirement age is 66.
Finally, those who turn 70 in 2017 will have average indexed monthly earnings of $8,426. That works out to $3,538 in monthly Social Security benefits, after adding on delayed-retirement credits worth an extra 32%.
You can see that Social Security doesn't replace a huge portion of earnings, but it's still a significant contribution. Depending on when you claim, you can replace between 13% and 21% of your pre-retirement income with Social Security benefits.
Don't count out Social Security
High-income individuals might think that Social Security isn't a very important part of their financial planning. Although saving for retirement is essential to fully replace pre-retirement income for the wealthy, Social Security does make a modest but significant contribution that will help even those making $200,000 a year be more financially secure after they retire.
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