How Does Social Security Fit Into My Retirement?
Understanding your future Social Security benefits is one of the first things you need to do when considering your retirement income streams. Although even the most optimistic among us has doubts about the long-term viability of Social Security, we should not discount it entirely. However, it most likely will diminish relative to the other items in your retirement portfolio.
The Social Security Administration currently mails benefit statements to eligible recipients every five years beginning at age 25. However, I encourage you to sign up for the online statement which you can then access as needed. You can create an account at https://www.ssa.gov/myaccount/.
Once you get your statement you will see that it provides a lot of information even though the data only takes up less than one page. Let’s look at the different categories and understand your potential future benefits.
There will be three payout amounts listed and these are calculated on the age you begin receiving benefits. They are:
Full retirement age – This is the age upon which you will receive full benefits and is determined upon your age of birth. This was previously age 65 but was increased to 67 if you were born in 1960 or after.
At Age 62 – You can still retire at age 62 but your benefits will be reduced from what you would have received at your full retirement age.
At Age 70 – If you decline to take Social Security at your full retirement age, your monthly benefits will increase until you reach age 70. This is the age at which your Social Security benefits will max out.
Your statement will also include benefit amounts for yourself should you become disabled. It will also detail survivor benefits for your family if something should happen to you before you reach full retirement age. This is especially important if you are the primary wage-earner and still have dependent children.
But What Does This Mean for Me?
First of all, remember that the retirement benefits listed here are based on an assumption that your earnings in the future will be similar to what you are earning now. For example, if you decide to take a lower-paying job, or leave the workforce altogether temporarily, in order to care for your children or elderly parents, your benefits would come in lower than what is projected now. The reverse is also true in that if you get a promotion that also has a big pay raise with it you would expect those benefits to increase.
Also, depending on where you are in your life, retirement could be as far as 30-40 years out. That’s a lot of time for Congress to enact changes such as pushing out the full retirement age or to reduce the benefit amount. Personally, I feel that the most likely scenarios involve increasing the limit on the taxable wage base and/or limiting benefits for those that have other income streams, e.g. from a 401(k).
What you must absolutely NOT do is take a look at that $1,000/month or $1,500/month and think that Social Security is going to solve all your retirement problems. Current estimates have Social Security fully funded only until 2034 and then it would have to be funded using payroll taxes. Given that it’s running a deficit now in terms of inflows and outflows that scenario is not sustainable.
So right now you’re thinking that I’m just full of bad news today. But really I’m not. Funding your retirement is not something you can just set and forget. You have to do a periodic check and adjust on all of your savings vehicles. This is especially true if you are a Millennial with another 30-40 years to go before retiring.
Here are my final thoughts: You need to get a copy of your benefit statement and see what the current estimates are. I would include these amounts when you calculate your total retirement but perhaps reduce your assumptions down to say 25%-50%. As you move closer to retirement you can then scale up your other investments if Social Security becomes too risky. And if Congress does somehow devise a plan to save Social Security you can rest easier having that additional financial security going into your golden years.
Once you have reviewed your statement please feel free to post any questions you have. I will be more than happy to help you get the answers.