Chris Stein, CFP®
Don’t Trust Social Security’s Benefit Estimate
Those of us who have been working for quite some time were accustomed to receiving a Social Security statement every year that reported to us our earnings history as well as Social Security’s benefit estimates for us at various retirement ages. Those statements stopped coming in 2011 as part of a cost cutting plan for the agency, but have started to me mailed again to some people, but only every 5 years. Those same statements are available from the Social Security website if you wish to proactively take a look at them.
Today I want to focus on that estimate of your retirement benefits. How accurate is it? As it turns out, maybe not very accurate at all, especially if you are not close to retiring. If you read the SS statement closely, and also dig into some of the SS rules documents (sounds fun, huh?) you will find the following things contribute to an inaccurate estimate:
1. Social Security assumes no future growth in average wages for our economy.
*Wage growth affects the “bend points” in the PIA calculation. *Higher average wages means more of your pre-retirement wages are replaced by your retirement benefit. *This assumption tends to make your estimate LOWER than reality.
2. Social Security assumes no future inflation.
*SS benefits are adjusted for inflation via the Cost of Living Adjustment (COLA). *Assuming no inflation means your benefit estimate is in “today’s dollars” and NOT a realistic prediction of what you will be receiving in 5, 10 or 20 years if there actually is inflation, and not many people think there will be no inflation. *This assumption tends to make your estimate LOWER than what you will really receive.
3. Social Security assumes you will continue to make the same salary you earn now, all the way to retirement without a raise.
*Technically they assume you will make the average of the last two years every single year going forward. *Most people move up the ladder, not stay at the same wage level, unless they are very close to retirement. *Depending on your actual earnings going forward this assumption can either OVERESTIMATE or UNDERESTIMATE your future benefit. They have to use something, and now you know how close their assumption is to your reality.
4. Social Security assumes you work right up to the day you start claiming your benefit.
*The estimates at age 62, your Full Retirement Age and at age 70 assume you work right up to those ages. *This assumption tends to slightly OVERSTATE your actual benefit since many people reduce or stop working prior to filing for Social Security.
The younger you are, the greater the chance your estimate is inaccurate. And since #1 and #2 above have the greatest impact over time we generally see that your actual benefit turns out to be HIGHER than those estimates you had been receiving all your working years. For those within 5-7 years of retirement the estimates can be pretty accurate, but for everyone else it is worth using a different sort of estimator to get a more accurate number to use in your planning. Instead of making generic assumptions you can tailor your prediction to your particular plans. Please contact us to assist you in putting together a more accurate estimate for your SS retirement benefit. And to listen to more on this topic, please use the play button below.
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