Social Security is the largest retirement program in the United States, but many pre-retirees don't have a thorough understanding of how Social Security works or how much they can expect to receive in benefits. With that in mind, here's a rundown of how much a six-figure earner can expect from Social Security, as well as an explanation of how the benefit-calculation process works so you can apply it to your own unique situation.

How is Social Security calculated?

I recently wrote a thorough explanation of the Social Security benefits formula, but here's the short version.

Image source: Getty Images.

The Social Security Administration (SSA) keeps a record of your earnings from every year of your working lifetime, up to the annual taxable earnings cap. When calculating your benefit, these annual earnings figures are all indexed for inflation, and the 35 highest years are averaged together. This average is divided by 12 to determine your average indexed monthly earnings, or AIME. If you don't have 35 years of Social Security-covered earnings, zeros will be used in determining the average for the missing years.

Once your AIME has been calculated, it's applied to a formula to determine your primary insurance amount (PIA), or your Social Security benefit if you claim at your full retirement age. For 2018, the formula is:

• 90% of the first $895 in AIME

• 32% of the amount greater than $895, but less than $5,397

• 15% of the amount above $5,397

It's important to note that the formula in effect in the year you become eligible (age 62) will be used, regardless of when you actually claim your benefits.

Finally, your benefit will be permanently adjusted if you claim benefits before or after your full retirement age. Depending on your full retirement age, your benefit can be permanently reduced by as much as 30% if you claim as early as possible or can be permanently increased by as much as 32% for waiting until age 70, the latest claiming age.

Social Security with a $100,000 average income

Since Social Security is based on 35 years of your earnings, there's no way of knowing what your benefit will eventually be because you're earning $100,000 right now.

Having said that, let's calculate a Social Security benefit for someone who averages $100,000 in inflation-adjusted earnings throughout their entire career. We'll assume this person turns 62 in 2018 so that we can use this year's benefit formula.

Annual income of $100,000 for an entire career translates to AIME of about $8,333 per month. According to the Social Security formula for 2018, this worker's primary insurance amount, or PIA, will be $2,686.54.

Workers turning 62 in 2018 have a full retirement age of 66 years and four months, so our hypothetical $100,000 earner would need to wait until this age to receive this entire benefit amount. If they decide to claim right away at age 62, their benefit will be reduced to about $1,970 per month.

Here's a chart of how much a career $100,000 earner would be entitled to if they claimed Social Security at various ages:

Data Source: SSA and author's own calculations. Benefits are rounded to the nearest dollar. Assumes beneficiary reaches 62 years of age in 2018.

As you can see, the age at which a $100,000 earner decides to start collecting Social Security makes a big difference.

Finally, it's important to mention that these benefits would all be increased by any cost-of-living adjustments, or COLA, that occur between now and when benefits are initially claimed. For example, if this person claims their retirement benefit next year at age 63 and there's a 2% COLA given in 2019, the benefit in the chart would be increased by that percentage.

How could this change by the time you retire?

As a final thought, if you're still many years away from retirement, it's important to take this information with a big grain of salt. Social Security is in solid financial condition for the time being, but this is expected to deteriorate rapidly over the next 15 years or so. Some sort of reforms will be needed to fix the program for the long term.

Now, there's no telling what form the eventual fix will take. It could end up being a simple tax increase, which could keep the Social Security benefit structure exactly how it's discussed here. On the other hand, some form of benefit cut, such as an increase in the full retirement age, is also a possibility.

The bottom line is that if you'll be reaching Social Security age in the near future, this discussion should be pretty accurate when it comes to your situation. Beyond that, however, there likely will be some changes.

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