Chris Stein, CFP®
Estimated Monthly Benefits
A reader from Arizona has some questions about his estimated monthly benefits from Social Security.
“I retired in mid-2019 and turned 67 on 12/19/2019. I will have no earnings through age 70 since I'm now retired. The SSA.gov website at that time estimated my monthly retirement benefit at age 67 at $3,066 and age 70 at $3,787. When I checked the website on 1/2/2020, my estimated monthly retirement benefit at age 67 had dropped $23 to $3,043, and at age 70 had dropped $81 to $3,706. The SSA.gov site stated the following: "Your estimates are based on the assumption that you will earn $70,061 a year from now until retirement." Question 1: What will happen with my monthly benefit at age 67 if I don't earn $70,061 a year since I'm already retired? Will it continue to go down as it did from 2019 to 2020? Question 2: What will happen with my monthly benefit at age 70 if I don't earn $70,061 a year since I'm already retired? Will it continue to go down as it did from 2019 to 2020? Question 3: If it continues to go down year after year, is there an incentive to apply for SS benefits now and avoid the step-downs that may occur every year while waiting until age 70?”
You made a good observation. And it brings us to some of the underlying assumptions that Social Security makes in estimating your benefit. Remember, this is an estimate; it's not necessarily what you're going to get unless your reality matches their assumptions precisely.
When you went online to see "Your Social Security Statement" in 2019, Social Security didn't have your 2019 earnings, as they hadn't been recorded yet. They did have your 2018 and 2017 earnings, though. When they estimate, they assume a worker will continue to earn the average of what was earned in the past two years for all the years up to the ages they quote on the second page of your statement.
On the second page, under "Your Estimated Benefits" and "Retirement," they'll show your estimated benefit at Full Retirement Age (or 'claiming immediately' if you've passed your Full Retirement Age). On the next line, they'll have the benefit estimate at age 70. And then, if you haven't reached age 62, they'll tell you what your age 62 benefit is estimated to be. (If you're past those ages, they don't tell you what your benefit would have been if you'd claimed years ago.)
Now, those are the standard three entries: your estimated benefit at Full Retirement Age, at age 70 and age 62.
But they’re just estimates. And if the assumptions don't hold and you stop working, then the estimates are going to be a bit off.
That $81 drop that you observed in your age 70 estimated benefit is a reduction of two percent (81 divided by 3,787). Yes, it's $81, which is real money, and that's every month.
The thing is: the larger amount was a dream that was never going to happen because it assumed you would work at the same income to age 70. And your reality is that you're retired. Social Security just has no way of knowing that yet.
Once 2020 arrived, and Social Security received your 2019 actual earnings, they would have seen that the earnings were lower. You had only worked for half a year, and your earnings were probably half as much as before. So that's what Social Security factored into its calculations of the next set of estimates.
The difference in what you saw online in 2019 and 2020 is not a reduction in your actual benefit. It's a reduction in what Social Security estimated your benefit would be. And in 2019, they had overestimated the correct amount of your benefit.
There's nothing that you need to do – or not do – in terms of changing your strategy. By claiming now, you won't stop that reduction. Whenever you claim, your earnings record will determine what your actual benefit will be, not what they estimated.
And once you have stopped working for a couple of years, the estimate is going to be much closer to reality because Social Security will look at the last two recorded years, and they will see zeroes. So, moving forward, Social Security will assume more zeroes.
In fact, at over 67 years old, you're not that far from age 70, so your reality is getting closer and closer to their assumptions.
But none of this is a secret. On the second page of your Benefits Statement, right under "Your Estimated Benefits," you'll see "How Your Benefits Are Estimated" in bold letters. The third paragraph in that section is titled "What we assumed," and it explains what they use to calculate their estimates. It's their best guess.
By your age, most people will have established their 35 highest-earning years, so if one or two years change as yours will because you've retired, the impact won't be significant. But it would seem that at the tail end of your working career, where you were making over $70,000 each year, those recorded incomes were replacing earlier lower years. The evidence is that Social Security was factoring in those later years. They had assumed you would be making that amount at ages 68 and 69, and they used that fact to create that higher benefit estimate. But that's not your reality.
You've probably seen the biggest drop in the estimate that you're going to see. But, again, when you go into Social Security to claim your benefits, you will get what you are truly owed, which is just a bit less than those slightly inflated estimates you were seeing.