Social Security is the cornerstone of most Americans' retirement plans, with over half of retired recipients relying on it for at least half their income. If you're not currently receiving benefits, the absolute best source for what you will likely eventually receive is the Social Security Administration itself. By signing up for a My Social Security account, you can get a personalized statement with an estimate of what your benefit will be, assuming steady earnings between now and when you collect.
If you read that statement carefully, you'll learn that it's chock-full of dire warnings about what your retirement will look like. Key risks it calls out include the overall level of your benefit, the risk of that benefit getting cut in around 16 years, and the chance that you won't qualify for as large a benefit as you might believe.
The headline giveth, the fine print taketh away
If you download your Social Security statement, the headline will tell you your estimated benefit. In the sample statement above, Wanda Worker is slated to receive around $1,903 a month at full retirement age. Digging below the headline, the detailed page indicates that Wanda would have to work and earn about the same amount from now until full retirement age to get that benefit amount.
The next page of her statement indicates that if she only works until age 62 before collecting, her benefit would be reduced to around $1,311 per month. As 62 is the most common age for people to start collecting Social Security, Wanda could be in a world of hurt if she's banking on her full expected $1,903 per month benefit.
That $1,311 benefit at age 62 is a whopping $592 per month -- a bit more than 31% -- less than her full retirement age benefit, knocking a substantial amount off her expected retirement income. If, like most retirees, Wanda will be relying on Social Security for a majority of her retirement income, that gap could mean the difference between comfort and subsistence living in her golden years.
Oh, by the way, even that amount is at risk over the next 16 years
Further down that very same page, in bold print, Social Security points out this significant risk to even being able to deliver on that promise: "Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2035, the payroll taxes collected will be enough to pay only about 80 percent of scheduled benefits."
That very real risk of the trust funds' emptying would knock Wanda's full retirement age benefit down to about $1,522.40 or her age 62 benefit down to around $1,048.80. Even those lowered numbers may be a bit optimistic. Last year's report indicated that the trust funds would empty a year earlier and that taxes from that point on would cover a bit less than that 80% figure once they did.
All this assumes Wanda continues working and earning the same amount...
All of a sudden, the $1,903 headline benefit number is at very real risk of dropping to $1,048.80 -- a nearly 45% reduction in benefits -- all within the first two pages of Wanda's Social Security statement. Just below that particular warning about the future of Social Security is a set of important factors that went into the estimates that were provided. Wanda Worker's personal key factors appear below:
What's crucial in that table is the line that starts with "Your estimated taxable earnings per year." Your Social Security benefit is based on your highest 35 years of covered earnings. If you work fewer than 35 years, or if downsizing forces you into a lower-paying job in the future, your future earnings record could have $0 years or years with lower salary amounts in them. That would lower your Social Security benefit.
According to the Bureau of Labor Statistics, the Labor Force Participation Rate starts declining after about age 55 -- which means after that age, fewer people are actively working. With Social Security's full retirement age set to reach age 67, that's a whopping 12 years of potential $0 or lower income years possibly pulling down Wanda's benefit from even those calculated levels.
Recognize the warnings -- and do something about it
While Social Security does provide the foundation of most Americans' retirement plans, that foundation is not enough on its own to assure a comfortable retirement. In addition, Social Security itself provides anyone who signs up for a personal account with these clear warnings about just how at-risk that foundation is.
The message is clear: If you want a comfortable retirement, you need more than Social Security will provide on its own. For most of us, the best path forward is to invest. The great news there is that you don't need tremendously strong returns to wind up with a decent nest egg to supplement your Social Security benefit. All you need is to invest consistently, with a reasonable strategy, over a decent period of time and the power of compounding will take care of the rest.
The key, however, is time. The sooner you get started saving for it, the easier it is to retire comfortably. So, get started now and better position yourself to cover the gaps that Social Security won't.