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High Income, High Replacement Risk: The Low Down on Social Security

You'll have a hard time coming up with anything resembling pity when you consider a risk faced by many affluent American's regarding their retirement prospects. But couple the amount of their income they'll need to replace from their own resources with uncertain markets, and you have a recipe for high anxiety for many.

Consider the case of a person who is say age 57 today and ten years from being able to receive Social Security at the full benefit amount. Let's say our affluent pre-retiree has a healthy income of $300,000 a year, and she is a married breadwinner. She has no pension waiting for her, but she has amassed a substantial portfolio of $2.5 million in retirement assets.

According to the Social Security Quick Calculator, her estimated monthly retirement benefit in 2032, at her full retirement age, is $3,406, in 2022 dollars. (That, by the way, is about as good as it gets for an estimated benefit; Elon Musk would not do any better on that score.) Annualized, this is $40,872 per year, and assuming her spouse gets a benefit about half as large as hers, the total benefits for the couple ten years hence are $61,308. Remember that number - it is the pinnacle of SS benefit amount, regardless of how much you earned over and above the maximum taxable wage base (currently $147,000 in 2022).

While that's a healthy income by most measures, it is only 21% of the income she is earning today. If she wants to replace 100% of her income in retirement, that means she needs to come up with $238,692 per year from her own resources. Even at a 75% replacement rate, she'll need to come up with $163,692 from her own assets.

Things look rosier the further down the income ladder you go, from a replacement perspective. At $50,000 of income, a person ten years from FRA is estimated to have Social Security replace almost 60% of a couple's income, assuming that $50,000 earner is the primary breadwinner. Even at $100,000 of income, the replacement rate is a healthy 47% for a couple, and 37% at $150,000. But it gets rapidly worse from there, with SS only replacing 30, 21, and 15% of a couples income if they made $200,000, $300,000, or $400,000, respectively.

That means the pressure is on for the future retirement income gap to be filled by sustainable cashflows from one's own accumulated pile. A combination of guaranteed and risk based approaches may be the solution for many.

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