Many seniors end up struggling financially once their careers wrap up. And part of the problem is that they overestimate the amount of money Social Security will pay them and don't save enough as a result.
But new data from the National Bureau of Economic Research reveals that many older Americans are actually underestimating the amount of income they'll get from Social Security. In fact, on average, pre-retirees are underestimating their annual Social Security income by approximately $1,896, or 11.5%.
Now on the one hand, that's not such a terrible thing. If you go into retirement thinking you'll get a certain monthly benefit from Social Security only to wind up with more, you'll be in a position where you suddenly have extra cash to spend. And it's certainly better to underestimate your annual Social Security income than overestimate it.
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But at the end of the day, it's important to have a solid handle on what Social Security will pay you. And there's a really easy way to do that.
Get an estimate of your personal benefits
Social Security does not pay all recipients the same amount of money. Rather, your benefits will be calculated based on the amount of money you earned during your 35 most profitable years in the workforce.
If you want to know how much money to expect from Social Security in retirement, all you have to do is access your most recent earnings statement. If you're 60 or older, it should arrive in the mail each year. Otherwise, you can create an account on the Social Security Administration's website and access it there.
That earnings statement will give you an estimate of your monthly benefit. Multiply that figure by 12, and you've got a great idea of what Social Security will pay you yearly. It's that simple.
Of course, the closer you are to retirement age, the more accurate your benefits estimate will be. If you're 40 years old, you may not want to rely on that number too heavily since you have a lot of working years ahead of you, during which time your income could change significantly.
But if you're 62 years old with plans to retire in a couple of years, your earnings statement should give you a pretty good sense of what to expect from Social Security. And that should, in turn, help you finalize your retirement planning.
There's no need for a guessing game
The formula used to calculate Social Security benefits is a bit complex. But the good news is that you don't need to rack your brain trying to figure it out. All you need to do is take a look at your most recent earnings statement to get a sense of what Social Security will pay you down the line. And even though that estimate may not be all that accurate when you're only partway through your career, it can at least serve as a starting point so you don't end up landing on a totally random number.
