In a previous blog post we discussed logging on to the Social Security web site to access your account. On this website you can view the information that the Social Security Administration (SSA) has on record for you. You can also access your Social Security Estimated Benefits where you can see the SSA’s estimate for what you can expect to receive for retirement benefits at the age where you become eligible (age 62) as well as at your Full Retirement Age and at age 70. But are these estimates accurate? Many say no if you are much younger than age 60 when you view the estimates. That is due to the method by which the SSA arrives at your estimate. For reasons difficult to guess, the SSA assumes the following in arriving at their estimate:
- There will be no economy wide real wage growth in the future
- There will be no inflation in the future
- Your future earnings will be about what you earned the past two years
While #3 might be plausible, the first two assumptions go against what we have seen happen in our economy since the 1940s. This has the effect of underestimating your retirement benefit, and the underestimation is greater the younger you are.
While we usually like to stress test our retirement plans, and underestimating benefits in the future certainly does that, we like to look at the reality of the situation and when putting together a specific plan we will use assumptions more customized for the individual. By using software that allows us to tweak our future assumptions we try to come up with a more accurate estimate for your future benefits.
By understanding how the SSA produces your estimate, hopefully now you can have a better overall view of what is in store for your retirement.
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