There are a lot of things about retirement that are hard to predict. Although it's easy to plug estimated returns on stocks, bonds, and other investments into a financial calculator, you can't count on them to tell you exactly how much money you'll have on the day you retire. It's even harder to try to guess what your expenses will be, especially with the quickly rising costs of important services like medical care. And while you may hope that government programs like Social Security and Medicare will still be around to help you make ends meet, it's not simple to figure out what you'd get from Social Security under the current rules, let alone whatever rules will apply when you retire. With all this uncertainty, it's tempting just to give up trying to plan for retirement.
Aware of this confusion and uncertainty, the Social Security Administration mails out an annual statement that gives some basic information about Social Security programs, including the amount you can expect to receive if there aren't any major legal changes to benefits before you retire. Reviewing this statement will give you a good idea of what you can get both at retirement and if you need other assistance, including disability benefits.
What the statement tells you
You'll generally receive your Social Security statement in the mail a few months before your birthday each year. The statement includes a great deal of basic information about Social Security, including concerns that the SSA has about its future viability, a brief description of the benefits that people are entitled to, and some general discussion of how the SSA estimates the benefits you're entitled to receive.
There are two important sections of the Social Security statement that apply specifically to you. The first is a list of benefit amounts that you and your family would be eligible to receive from Social Security. The second is the SSA's records of how much money you've earned throughout your working life. While the primary purpose of the statement is to give you information that you can use for your personal financial planning, it also gives you an opportunity to check the SSA's figures to make sure that you're getting all the benefits you've earned.
What you've earned
Your earnings record usually has information about all the wage and salary income you've earned throughout your career. Because the SSA measures your income by looking at how much in Social Security and Medicare payroll taxes you've paid, your earnings history may not include income that wasn't subject to these taxes. For example, some student employees may be exempt from payroll tax withholding if they work in jobs that are related to their course of study, such as teaching assistants. For the most part, however, you're likely to find most if not all of your income on the statement. If you see mistakes, you should contact the SSA right away to get your records corrected. If you don't, you may not get as much money in benefits as you should.
If you have a relatively large income, you may notice that your earnings for Social Security purposes are different from those listed under the Medicare column. This is because there is a limit on the amount of earnings that are subject to Social Security taxes. For 2007, any amount over $97,500 is not subject to Social Security taxation. Although Medicare taxes used to have similar limits, they now apply to your entire earnings.
Estimates of benefits
The most valuable piece of information the Social Security statement gives you is its list of estimated benefits. By making the simple assumption that you'll continue to earn whatever amount you earned during the previous year, the statement gives you information about how much you'll receive in retirement benefits at various ages and disability benefits if you need them. In addition, it also tells you how much your spouse and children might be eligible to receive after your death.
Looking through the benefit estimates makes for interesting reading. One question that many people ask is whether it makes sense to start taking early retirement benefits when they first become eligible at age 62 or whether they should wait until their full retirement age. By looking at each estimate, you can judge whether or not it's worth it to wait. For instance, say that your statement says you'll get $1,000 each month if you take Social Security at age 62 or $1,500 if you wait until the full retirement age of 67 that applies to people born in 1960 or after. If you take the smaller amount early, you'll receive a total of $60,000 by the time you reach age 67. Even ignoring interest and inflation adjustments, it would take you 10 years of receiving the higher monthly payments to break even.
Also, it's helpful to know whether or not you're eligible for certain benefits. For example, if you haven't been working very long, it's likely that you won't yet have enough earnings credits to receive benefits at retirement. Disability benefits require fewer credits, though they must have been earned more recently. Seeing how much your family would receive if something happens to you is also helpful for your estate planning and in evaluating your need for life insurance.
When you get your Social Security statement in the mail, take the time to review it. It's an extremely useful tool to help you with your retirement planning. By looking at your statement each year, you'll be able to track your progress toward a happy and prosperous retirement.
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Need some help evaluating Social Security and other retirement issues? Take a closer look at Robert Brokamp's Rule Your Retirement newsletter, which you can try for free. There you'll find lots of helpful advice to prepare to live your golden years in style.