To plan properly for retirement, you have to know how much money you should expect to receive in Social Security benefits. Fortunately, you can check your estimated benefits anytime by establishing a my Social Security account on the SSA website. Unfortunately, these estimates are just that — only estimates, subject to significant change. That change may not be in your favor.
The SSA calculates your benefit using the 35 years of your highest annual income. In producing estimates, it assumes that your income will stay at the current level throughout your remaining working years until you draw benefits and/or reach full retirement age (FRA). Layoffs, job losses, and similar negative income events will make your estimate too high. Conversely, raises and career changes to higher-paying positions will make your estimate too low. Essentially, this approach assumes a highly unlikely zero wage growth and zero inflation until you retire.
The further away that you are from retirement, the greater the likelihood of changes that will significantly alter your estimate — especially if you haven't established 35 full years of income yet.
In the calculations, your income is indexed to account roughly for the changes in average wages over time. Once you have established 35 years of indexed income, the next year is compared to the lowest indexed value in your work history. The larger value is kept and the lowest value is dropped from your estimate calculations. Your average indexed monthly earnings are then run through a separate formula to calculate your "primary insurance amount" — in other words, the benefits you will receive when you reach your FRA.
A sample page for calculating benefits is available on the Social Security website. If you prefer to let a computer do the work for you, the SSA offers an online Retirement Estimator that performs these calculations based on current information. Remember that this estimator uses many of the same assumptions that created your estimated benefits on the my Social Security account (to keep the calculator user-friendly, you input less information than the SSA uses for your formal estimate).
Even if the SSA's estimates were spot on every year and your income level did not throw off the assumptions, there is one wild card that you cannot predict no matter how hard you try — Congress. Social Security law undergoes periodic revisions, and almost every year there is at least some proposed change to benefits. How confident are you that any of Congressional changes will increase your benefits?
As you run through your retirement calculations, it's wise to follow the SSA's approach and expand on it to account for the unpredictable economic factors that are built into the estimates.
When planning your retirement, take your projected Social Security benefits and assume that some factor will drop those benefits even further. Use the SSA's online calculators to run different scenarios. Cut your expected benefits by some percentage that meets your comfort level, and make those cut percentages even larger if you are well below retirement age. That will provide motivation to fill in the gap with your own retirement funds (401(k), IRA, etc.) and give you more control over your retirement.
As you plan, take into account any alterations caused by drawing benefits on anything other than your FRA. Drawing benefits early reduces your monthly benefits and waiting to claim beyond your FRA increases them.
Spousal benefits are lower than benefits on your own record, but claiming them may make more sense if the difference in lifetime income is large. Couples should use the online Social Security Retirement Estimator to check individual benefits and calculate whether to claim spousal benefits or claim on individual employment records.
The main message is to plan your retirement using conservative scenarios that are below your SSA benefit estimates. "Start a retirement fund as soon as possible," advises Consolidated Credit Director of Education and Public Relations April Lewis-Parks. It's better to have more money than you need in retirement than not enough. You can always direct extra money toward doing good deeds after you are gone.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.