Today's workers have plenty of different opinions about how Social Security fits into their retirement plans. Some think it won't be there for them at all, which is untrue. But more troubling is that some think they can depend upon it to provide most or all of their income in retirement. Overestimating your Social Security benefit could lead to dangerous underestimates of how much personal savings you need to amass. This mistake is more common than you think.
Americans overestimate the average Social Security benefit by 28%, according to a recent Nationwide survey, and an alarming 26% of those polled believe they could live comfortably on Social Security alone. But they're in for a rude awakening.
Hard truths about Social Security
The workers surveyed by Nationwide estimated they'd receive $1,805 from Social Security per month, which amounts to $21,660 per year. But current retirees only receive an average of $1,408 per month, or $16,896 per year. That's a difference of $4,764 annually or more than $95,000 over the course of a 20-year retirement.
What's more, even the workers' inflated Social Security estimates wouldn't be enough to cover the average retiree's annual expenses. The average household headed by an adult 65 or older spends about $50,000 per year, according to the latest data from the Bureau of Labor Statistics. Social Security won't even cover half of that.
Today's workers also have to come to terms with the uncertain future of Social Security, which could reduce the value of these benefits even further. The latest estimates say that Social Security's trust fund will run dry in 2035, and after that point, it will only be able to pay out 80% of owed benefits unless the government makes changes to the program. We don't know what those changes will look like, but some possibilities include:
- Increasing the Social Security tax rate (currently 12.4%, split evenly between employee and employer).
- Increasing the full retirement age (currently 66 or 67, depending on birth year).
- Increasing the ceiling on income subject to Social Security tax ($132,900 in 2019).
- Decreasing the annual cost-of-living adjustments (COLAs) that help Social Security's value keep pace with inflation.
- Decreasing benefits.
The government may employ one or a combination of these strategies, but whatever the solution, Social Security likely won't stretch as far in the future as it does today.
Social Security's rightful place in your retirement plan
You need an accurate idea of how much to expect from Social Security to avoid drastically underestimating how much you must save for retirement on your own. You can use the above average as a starting point, or get a personalized estimate by creating a My Social Security account. Logging on will tell you how much you'd be entitled to at 62, at your full retirement age (FRA), and at 70 based on your current work record.
The age you begin claiming Social Security affects how much you'll get each month. If you want your full scheduled benefit, you must wait until your FRA. You can begin claiming as early as 62, but if you do, you'll only receive 70% or 75% of your scheduled benefit, depending on if your FRA is 67 or 66, respectively. You can also delay benefits past your FRA, and your checks will increase until you reach the maximum benefit of 124% of your scheduled benefit for an FRA of 67 or 132% for an FRA of 66.
But even if you go for the maximum benefit, Social Security likely still won't cover all of your retirement expenses, and it was never intended to. It was designed to replace only about 40% of preretirement income for average earners, according to the Social Security Administration, though it doesn't disclose the average earnings benchmark. It could cover more than this for lower earners or less for higher earners. Using estimates from your My Social Security account will help you determine how much it will cover so that you can estimate how much you need to save on your own.
Ways to boost your Social Security benefits
If you're not happy with the size of your estimated Social Security checks, it's not too late to change them. Anything you can do to increase your income today, like working overtime or starting a side hustle, will help increase your Social Security checks because they're based on your average monthly income during your 35 highest-earning years.
The catch is, you have to report all of this extra income to the government and pay taxes on it in order to enjoy the larger Social Security checks later. If you don't, your Social Security checks won't be impacted, and even worse: you could get audited.
You could also consider delaying Social Security, if you can afford to do so. A common strategy used by couples is for the lower-earning spouse to begin claiming benefits at 62 so the higher-earning spouse can delay benefits until 70. Then, if the lower-earning spouse would be entitled to more money under the higher earner's spousal benefit, they're automatically switched over.
Social Security is an important part of your retirement plan, but overestimating its value could cost you in the long run. If you haven't already, take the time to figure out how much you can reasonably expect from Social Security and make any necessary adjustments to your retirement plan to keep yourself on track.