Your Social Security benefits, while not typically big enough to live on, can be a substantial addition to your sources of retirement income. But if you're overly optimistic (or pessimistic) about how much you'll receive, you can throw off your entire retirement plan and end up short on money once you retire. Fortunately, the Social Security administration provides two helpful tools to estimate your benefits.
How are my benefits calculated?
But before we dive into those nifty tools, let's look at what determines the size of your benefit checks. The Social Security Administration uses your income during the 35 highest-earning years of your life to calculate your Social Security benefits. Those earnings are indexed to account for inflation (otherwise, earnings from decades ago would be ridiculously low compared to more recent years), then averaged, then divided by 12 to produce your average indexed monthly earnings (AIME), which is run through a formula to determine how much you'll receive in benefits.
If you worked less than 35 years, the missing years will be factored into the calculation as zero-earning years, which can significantly lower your average. For that reason, it's a good idea to accrue at least 35 years' worth of earnings before claiming Social Security.
Though your earnings record is the biggest factor in your Social Security benefits, it isn't the only one: The age at which you choose to claim your benefits also has a major impact on those monthly checks. If you wait until your full retirement age to file your claim, you'll receive the amount calculated based on your earnings record. But if you claim your benefits before full retirement age, your benefit amount will be permanently reduced; and if you wait beyond full retirement age, your benefits will be permanently increased instead. So you can't get a good idea of what your benefits will look like until you pick your retirement date.
Tool No. 1: Your Social Security statement
The Social Security Administration provides a statement, available on its website and updated annually, that includes an estimate of how much you'll receive in retirement benefits. The closer you get to your planned retirement date, the more accurate that estimate will be. To come up with the estimate on your statement, the agency assumes that you will earn exactly the same amount you earned in the last year for every year to come. Of course, that's a pretty unlikely scenario, so if you're a decade or more from claiming your benefits, you can't put much faith in this number.
Besides providing your benefits estimate, the statement lists your earnings record to date. It's a good idea to review this record every year to make sure your previous year's earnings are accurate. It's much easier to fix an error now than a decade or two in the future (for example, imagine the challenge of finding a copy of this year's W-2 in 10 years).
Tool No. 2: The Social Security retirement estimator
If you've earned at least enough work credits to qualify for Social Security (which usually means you have at least 10 years' worth of earnings), there's another resource you can use to calculate your Social Security benefits: the retirement estimator. To use the estimator, you'll need to provide some basic information: your name, your Social Security number, and your date and place of birth. This is not information you would want to fall into the hands of a fraudster, so don't use this tool while on a public computer or an open Wi-Fi network, such as the one at your local Starbucks.
The retirement estimator will ask you to enter your previous year's earnings, and then it will use that number to come up with three retirement benefit estimates: one assuming you claim your Social Security benefits at full retirement age, another assuming you claim them at age 62, and a third assuming you claim them at age 70 (the age at which your potential retirement benefits reach their maximum).
The estimator can be handy if you have had a sudden change in income (or expect to have one in the near future); you can get an immediate idea of how this will change your Social Security benefits without having to wait for next year's Social Security statement. Just click on "add a new estimate" near the bottom of the retirement estimator page and enter what you think your average future earnings will be.
Without a crystal ball, you can't know how big your Social Security checks will be, especially if you're a long way from retirement. Not only could your earnings change in the future, but changes to Social Security policies could affect how benefits are calculated. Still, the Social Security statement and retirement estimator can give you an idea of what to expect -- and how much you'll need to save on your own to cover the expenses your benefits won't.