One of the most common questions that people have about retirement is how Social Security works. As you near retirement, you should start receiving annual statements showing projections of your future Social Security benefits. If you are a long way from retirement, you can go online at socialsecurity.gov and order a statement that gives you an idea of what to expect. Let’s take a moment and look at the small print that most people, unfortunately, don’t read or take notice of.
The first thing you should look at on your Social Security statement is your earnings record. Remember, your benefits are based on the money that you earned throughout your lifetime. Going year by year, look to see if there’s a year when your full income was not reported or (in some cases we’ve seen) totally missing for that year. Then, go to their website or call Social Security to make certain that your earnings are reported because your benefits are based on your annual reported earned income.
Here are some more important benefits to know about Social Security noted in your statement:
- Social Security benefits are not intended to be your only source of retirement income. You have to plan on having savings, investments, pensions, or other retirement accounts to make sure that you have enough money when you retire.
- Social Security benefits are based on 40 credit hours. Sometimes people will ask how the calculation is made: it’s based on the 35 highest income earning years of your life. Unlike some pension programs that might be based on the last 2-5 years and you better hope those were your highest earning years; Social Security is based on your 35 highest income earning years. If you’ve worked more than 35 years, the lowest earning years are removed from the calculation.
- Social Security makes adjustments for the cost of living, which is very different from other pension programs. That’s a huge benefit.
- The age at which you claim benefits can affect the benefits your spouse may receive either in retirement or upon your passing. So, by waiting for a higher benefit for yourself, you can provide a higher benefit for your spouse.
- If you are divorced now, but were previously married for at least 10 years, you may be able to claim benefits based on your ex-spouse's record. If your ex-spouse receives benefits based on your record, it’s important to note that that does not affect your or your current spouse's benefit amounts.
- Unlike investments or other retirement accounts that you may have elsewhere: your Social Security benefits will last for as long as you live. Taking benefits before your full retirement age (as early as 62 years of age) lowers your monthly benefit amount. Delaying your benefits beyond your full retirement age (up to age 70) increases your monthly amount for the rest of your life. There are calculators on the Social Security website that estimate how long you may live based on your age and your gender. Just realize that the calculations that they make are based on actuarial tables for everyone within the Social Security system. Your life expectancy may be longer if you are healthier, more educated, or have a better lifestyle than the average person. The numbers that they use are based on a broad population. If you have the opportunity to live longer than the average individual, your benefits may be substantially higher.
- Lastly, Social Security is not meant to be your only source of income in retirement. On average, Social Security will replace about 40% of your annual pre-retirement earnings.
If you have additional questions about how Social Security is a part of your future planning, we are here to help. Social Security should be a big part of your retirement planning, and we can help you navigate how to get the best life possible. If you are ready to have that conversation, then perhaps it’s time for you to schedule your Financialoscopy®.