Never Too Soon
Did you know that if you have been in the workforce for awhile, you can check your Social Security statement by accessing it online? It’s true.
If you are 60 years or older, and not currently receiving Social Security benefits, and do not yet have a My Social Security online account, the Social Security Administration (SSA) will mail an annual copy directly to you. They usually mail these statements three months prior to your birthday. You also have the option of visiting your local SSA office or calling them on their toll-free number. Caution: the SSA advises that you call on Wednesday, Thursday, or Friday to make your hold time as short as possible.
The purpose of these statements is twofold. First, it is tries to make planning for your retirement easier by providing you with an estimate of what your monthly benefit would be at your Full Retirement Age (FRA), as well as your reduced benefit amount at age 62, and your greater benefit if you wait until the age of 70 to start receiving your benefits. Many people are shocked to realize that Social Security doesn't provide the monthly benefit that they thought it would. According to the SSA, Social Security only replaces about 40% of the average retiree's income. This is a wake up call to many who realize that they don't have the other 60% lined up just yet. Notice, that this was for the average retiree. If you earn a higher income, Social Security will replace an even smaller percentage!
Check Those Numbers
The second reason that the SSA provides you with this statement is so that you can verify your earnings record. It's right there on page three. The complete chronological list of the years that you worked (maybe since you were in high school), the amount of your taxed Social Security earnings, as well as your taxed Medicare earnings. And if you are sitting down, take a peek just below your annual earnings record and see how much you have paid over your working life in Social Security and Medicare taxes. Ouch!
It is rare to find an error in your life-time earnings record; but it can happen. If you find a discrepancy, call the SSA right away so that they can rectify the situation. You deserve every dollar that you are entitled to.
How Are My Social Security Benefits Actually Calculated?
Have you ever heard of AIME? It stands for average indexed monthly earnings and it is the cornerstone for calculating your Social Security benefits. To determine your AIME, the SSA looks at your highest 35 years of paid wages, up to the Social Security taxable maximum amount and adjusts them to account for inflation. These 35 years of indexed earnings are added together and then divided by 35 to find your annual average. This amount is then divided by 12 to convert it to your monthly average or your AIME.
But wait....we're not done yet. We still haven't arrived at your basic Social Security retirement benefit, or your Primary Insurance Amount (PIA). In order to determine your PIA, SSA applies another formula to your AIME. The formula for 2019 is:
- 90% of the first $926 in AIME
- 32% of the amount of AIME greater than $926, but less than $5,583
- 15% of the amount of your AIME over $5,583
Keep in mind, this is the formula for 2019. The dollar amount breakpoints change each year.
So for example, if your if your AIME is $4,900 this year, your PIA would be $2,105.08 per month. To arrive at this amount, we take 90% of $926, which is $833.40. We then take 32% of the remaining $3,974, which is $1,271.68. Adding these two amounts gets us to your PIA of $2,105.08.
How Accurate Are These Estimates?
The older you are, the more accurate these benefits estimates will be for you. On the other hand, if you are currently 48 years old and have another 17 years left in the workforce, your estimates could be a little less accurate. Obviously, if you continue to work beyond 2019, your PIA will change. This is due to the fact that you will continue to add to your earnings history. In order to provide you with a meaningful estimated social security benefit amount today, the SSA simply sets your latest year’s earnings as the base line. It assumes you’ll earn that amount each year, increased by the average annual wage increase, until the year you claim your benefits. Be careful! There are many situations where this is not an accurate assumption.
You could very well earn less in the future than you are earning now. You may not get a pay raise for a few years. You might lose your job and be out of work for an extended period of time. You could become sick or disabled. You also might retire from work too early to claim your optimal Social Security retirement benefits. Or you might voluntarily or involuntarily take new employment at lower pay for the years before you end up claiming your benefits. If any of these situations happen to occur to you, the SSA’s estimate of your retirement benefits are quite likely to be higher than the benefits that you will actually receive.
Your estimated Social Security benefits could also be understated. You could actually receive a higher amount per month than was reported to you on your latest Social Security statement. This is true because younger people are unlikely to earn the same wage, increased for wage inflation, every year for the rest of their careers. They will receive promotions, raises, job changes with more responsibilities, and other fluctuations that aren’t factored into these estimates.
Fortunately, the closer you are to claiming your retirement benefits, the more accurate your estimate will be. This is true in just about any form of planning. The closer you are to the date of a projected outcome, the fewer variables there are to get in the way of the projections. So if you are already in your early 60s, you can feel pretty confident in your Social Security retirement benefits estimate. But if you are only in your 40s, you should be less confident in your estimate of what Social Security will ultimately pay you.
It's Finally Time to Claim Those Benefits
Another thing to keep in mind about your Social Security benefits is that while your monthly benefits are determined based on your earnings history, the age that you first claim these benefits has a major impact on the benefits that you actually receive for the rest of your lifetime, and potentially your spouse's lifetime. It is certainly not a decision to be taken lightly. While you may be tempted to grab your benefits as early as possible, making this choice could be detrimental to your overall financial plan. You may get your money sooner, but you will also reduce your benefits substantially in the process. For example, if your full retirement age is 67 and you decide to file for benefits when you are 62, your monthly benefits will be reduced by 30%. If you claim your Social Security retirement benefits at your exact FRA (which is somewhere between the age of 66 and 67, depending on your year of birth), you will receive the exact monthly benefit that your wage history allows for.
Do you want a higher monthly benefit? You do have the option to delay taking your benefits anytime up until you turn 70 years old. For each year that you wait past your FRA, you will receive an 8% increase in your retirement benefit amount. Once you turn 70, that incentive stops.
Wrapping It All Up
In summary, although you may have a hard time determining what your Social Security retirement benefits will actually be well in advance of your retirement, remember what I said earlier. Social Security retirement benefits will only replace about 40% of the average worker's previous income. In my experience, most retirees require approximately 70% to 80% of their former earnings in order to enjoy a worry-free retirement. So regardless of what Social Security ends up paying you, it is extremely important to save diligently during your working years in order to maximize your probability of enjoying the retirement that you have always dreamed of. In this way, no matter what happens with regards to your Social Security retirement benefits, you will have the nest egg that you need to achieve everything that is important to you.
Have additional questions? Let's chat!