Image source: Social Security, via Wikimedia Commons.
Social Security plays a foundational role in the retirement plans of millions of Americans. Despite that key position in so many people's plans, the reality is that it's quite difficult to figure out exactly what you'll get from the program until you file to start receiving benefits.
What makes it so challenging is the fact that Social Security uses a complicated formula to determine your benefits. In a nutshell:
- It starts with your 35 highest-earning years, with your income counting up to whatever the Social Security cap is for that particular year.
- It adjusts your income during those years by an "indexing" formula that compares your income to the average income during each of those same years.
- Once you reach age 60, the indexing stops, though any income you earn may still count.
- You can start taking retirement benefits at any time between age 62 and 70, with your payment increasing the later in that window you wait.
- Benefits themselves get reviewed and potentially adjusted for inflation once a year, so what you get one year may be different the next.
So, what will you get?
Because of that complexity, nobody -- not even the Social Security Administration -- knows exactly what your benefit will be until you actually apply for it. What the Social Security Administration can offer you, though, are three different ways to get its best estimate of what you will get when you file, based on what it knows about you.
Option 1: Create your personal "My Social Security Account." This link will take you directly to Social Security's website, where you can create an account to view your personalized Social Security statement. The advantage of this option is that you can access your account online and always be able to get Social Security's latest and greatest estimate of what you can expect.
Option 2: Mail in a request for a paper statement. This link will take you to a form you can print out and mail to Social Security, asking it to send you a personalized Social Security statement on paper. You can expect to receive your statement about four to six weeks after you send in your request.
Option 3: Wait until you reach age 25, 30, 35, 40, 45, 50, 55, 60, or more. If you haven't set up your personal My Social Security Account, and you're not already receiving benefits, Social Security will mail you a paper statement around your birthday for each of those milestone years.
What will your statement tell you?
Important information that your Social Security statement will tell you includes:
- Which Social Security benefits you qualify for (and what it'll take to qualify for any you don't),
- An estimate of how much you'll get, depending on when and how you collect,
- An overview of how benefits are calculated,
- Your personal earnings record that went into creating the estimate, and
- The key risks Social Security faces regarding its ability to pay expected benefits over time.
Nobody can tell you exactly what you'll get until you apply for benefits, but your personalized Social Security statement will give you the best available estimate. With it, you can plug a realistic dollar range on what you can personally expect from Social Security into your overall retirement plan. That way, you can more reliably use Social Security as the foundation it's intended to be, without severely overestimating or underestimating what it can provide.
Why your numbers matter
At its healthiest, Social Security only provides about 40% of a typical retiree's preretirement income, and if you're a higher earner, that percentage decreases. As of January 2016, the average Social Security payment to a retiree will be around $1,341 per month.
Additionally, Social Security's most recent Trustees' Report indicates that the Trust Funds that support the program's payout will deplete by 2034. If nothing changes between now and then, that would immediately slash benefits by 21%, with the cuts eventually reaching 27%. For the typical retiree, that initial cut reduces the payment to closer to $1,059 per month, and the longer term cuts take the payment down to about $979.
Regardless of whether you're planning around Social Security with the anticipated cuts or assuming that its issues will get resolved, knowing your numbers gives you something tangible to plan around. So, take advantage of Social Security's offer to tell you your estimate of your eventual benefits, and use that data to take charge of your retirement plan.
