Social Security and Retirement Planning

Have you ever looked closely at that Social Security statement that shows up in the mail around your birthday? Have you ever really analyzed it, or did you just check if your earnings were correct and file it away? Have you ever thought about using it to better plan your retirement?

What is a Social Security statement?

A Social Security statement is a snapshot of your contributions into the Social Security and fund.

You receive it annually, approximately 3 months before your birth month. If you’re under 25 or currently receiving benefits, you won’t have a statement mailed out to you. If you haven’t received on, you can request it by simply contacting the agency.

As a reminder, while Social Security is mainly thought of as a retirement program, it also covers those that are disabled and families who have lost a parent.

What information is included?

There is a lot of information covered in your Social Security statement, so let me share some highlights of the form.

  • Your estimated benefits. The second page will let you know if you qualify for benefits based on your current credits. What you may notice is the big jumps in Social Security benefits if you take it at age 62, 67, and 70. This information can affect your decision on when you want to use your Social Security.
  • Your earning record. This is an important section, as you get to see what the Social Security Administration has recorded for your Social Security and Medicare earnings. Make sure that your information is correct as it affects what you can collect when you retire.
  • Facts about Social Security. While they don’t share the exact formula for calculating benefits, the Social Security Administration shared the process. In short, your benefits are based on your lifetime earnings. Your actual earnings are “indexed” to account for changes in average wages since the year the earnings were received, and they estimate an average based on the 35 years during which you earned the most.

Social Security benefits and retirement planning

Now that you have this information, how can you use it? If you’re approaching retirement, then it probably makes sense to include your benefits in your retirement planning, as it’s unlikely that things will dramatically change.

If you have decades before you’re going to retire, on the other hand, then I suggest using your statement in a slightly different way. I find that seeing how much (or how little) Social Security will cover for me is motivation to build up my own retirement fund.

The currently estimated payments from Social Security will not cover my living expenses, so I need to build my own nestegg. Since Social Security is intended to be a safety net, as opposed to a primary source of income, that’s how we’re treating it when coming up with our retirement planning.

If the Social Security is still intact when we retire, then we’ll consider it a bonus. But we’re not counting on it as a core piece of our retirement strategy. What’s sad is even your own statement acknowledges that fact on the front page. Too many people have it as their largest source of income while retire.

Create a tripod to support your retirement

If you’re planning for retirement, you should try to have at least three forms of income for your future.

  • Employer plan. Depending on where you work, this might be a 401(k), 403(b), 457(b), Thrift Savings Plan, or some combination of the above.
  • Personal savings. These are most often held in a Traditional or Roth IRA, as well as a taxable brokerage account.
  • Social Security. Like I said above, it’s probably best to treat this as a safety net.

Check with your employer to see if they will match your 401(k) contributions, and then automate your contributions. Currently, you can contribute $16, 500 annually to your 401(k) if you’re under 50 and $22, 000 if you’re age 50 and above.

The annual elected deferral limit for the Thrift Savings Plan is also currently $16, 500. The same goes for your 403(b) account, so there are no excuses to skimp on saving.

If Social Security doesn’t come through, you still have your 401(k) or IRA to count on. If you haven’t already, start contributing. The annual contribution limit for IRAs is $5, 000 if you’re under 50 and $6, 000 if you’re over.

Thoughts on Social Security

Have you ever caught a mistake with your statement? Do you think Social Security will be around when you retire? If so, how do you account for it when planning your retirement?

10 Responses to “Social Security and Retirement Planning”

  1. Anonymous

    I learned a long time ago that I cannot rely on one source for anything. Social Security is no different. I will have Social Security, Pension, IRA, 403B, Roth IRA, Brokerage account and a side business for retirement. In addition, I can sell my paid off (by retirement) home or rent it out and generate more income.

  2. Anonymous

    Years ago I worked for a fly-by-night restaurant that didn’t pay their taxes. So the first time I got one of these statements from the SSA, I had no earnings reported for a three year period. I contacted them (I believe by phone) and ask how to fix the record. After sending in copies of my year-end paystubs from that job the SSA fixed my earnings report in no time and sent another report. I was impressed.

  3. Anonymous

    Before everyone gets their panties in a bunch, insisting that Social Security won’t be around when they retire, let me assure you: IT WILL. The ONLY way that Social Security will cease to exist is if the law is repealed and the payroll tax is eliminated, which will NEVER, EVER happen. EVER.

    Social Security is by far the most popular entitlement program in America, and one of the most effective pieces of legislation ever passed in this country in terms of what it’s done to the rate of senior citizens living in poverty. Americans – even the most conservative, small-government minded amongst them – will NEVER give it up.

    That said, Social Security – like Medicare – is also a victim of it’s own success, because they’ve both led to an increased quality of life AND average life expectancy for Americans across the board, which means more people are living longer and claiming more benefits. For example: When Medicare became law, the average life expectancy in America was 68 years; when SS was enacted, it was even lower. Given that one can not enroll in Medicare until they are 65, this meant that the average person who enrolled when it became law would claim benefits for approximately 3 years and ultimately would not cost “the system” all that much money.

    Today, the average life expectancy in America is 78, which means the average Medicare enrollee claims benefits for 13 years, with each successive year becoming increasingly expensive, as their health deteriorates.

    The same thing applies to Social Security.

    This reality is rarely discussed when talking about the problems these two programs face, and instead, the issue is framed as being solely about THE NUMBER of people collecting benefits. But there’s no doubt about it – the number of years that they collect them is a major contributing factor.

    The truth is that Social Security will continue to collect payroll taxes and will continue to pay out benefits for all time. It will collect FEWER taxes and pay out FEWER benefits, but both will still be in tact. To be more specific, starting in 2037, Social Security will only be able to pay out 76 cents on the dollar for promised benefits.

    What that means for most of us under the age of 40 is that when we reach retirement age, if our promised benefits are $2000 per month, we will actually only receive about $1520.

    Ultimately, the problems that Social Security faces are major, but they can also be largely solved with some relatively minor tweaks to the system. First: The minimum age at which one can collect benefits should be indexed to the Average Life Expectancy in America, minus 10 years. This means that if the ALE is currently 78, one should not be able to collect benefits until they are 68. As the ALE rises – and it most definitely will – so should the minimum age at which one can collect benefits. If and when the ALE in America is 90, the minimum SS benefits age should be 80. That alone will go a long way in maintaining SS’s solvency in perpetuity. However, some MINOR changes to the way the payroll tax works – both in terms of the rate and the cap – are also in order and would virtually eliminate all worries about the future of the program.

  4. Anonymous

    Good article, a small comment (correction?). The SSA does tell you how the “Accrued Benefit Formula” works. It is also called the Primary Insurance Amount (PIA) or Full Retirement Benefit (FRB), or sometimes the Social Security Benefit (SSB).

    It is a Career Average Formula (High 35 year average, out of life time contributions) applied to an A + B+ C formula, based on Bend Points that change annually. It also must project in the past/and future for wage indexing (this helps you).

    If you read this far, and are completely confused that’s ok. Pension Plans are overly complex in language but extremely simple in math.

    Read your statement, fill out a spreadsheet (electronic or on paper) and then compare. If you cannot match the numbers, go visit your local SSA branch. They will help you.

    And if you are lucky enough to have a private pension, be sure to read the Summary Plan Description to see if the Private Pension integrates the Public side, as this may increase/decrease the amount of money you receive from your employer sponsored plan.

    Not sure if any of us under 60 crowd will ever see it, but the Primary Insurance Amount (i.e. Social Security) is a good benefit, and hopefully those idiots (of both parties) in D.C. can figure out how to keep it alive.

  5. Anonymous

    Rereading my comment “SS will not be my safety net”. True SS is not”is not a wise choice retirement fund”, but it (SS) will be my main source of income because of unwise choices made earlier in life. At least I didn’t lose money, I just never made any!

  6. Anonymous

    Social security is not configured as a retirement savings account. It works more like an insurance policy for disabled or retired persons. I know people who have been collecting SS disability payments for decades and are still nowhere near their legal retirement age. If you work and contribute to SS for even a fraction of your life, you will never get out what you put in because you are paying the way for those who collect but were never able to contribute.

    Social security is exactly what it’s name implies. It offers basic needs income for those who are unable to work. It is a good program which helps those in need, and thus it will be exploited by some. It is not a wise choice retirement fund for those who work and plan their life.

  7. Anonymous

    I’m 64, low income and SS will NOT be my safety net. I plan to work as long as I can and save most of the $900 monthly payments I would receive after 66. I do appreciate these websites and am learning how to save and pay off old debts. Thank You

  8. Anonymous

    Echo the thoughts of Floridian. I don’t consider SS at all in my planning. If I am lucky enough to still get it when I retire.. I’ll consider that as winning the lottery!

  9. Anonymous

    I’ve never actually checked it to make sure my earnings were correct (they look about right). When I got my last one, I added up how much I’ve paid in over the last 10 years (just my share) and about got sick knowing I’ll most likely never see a penny of it again. It was a LOT. I’m one of those who believes SS will NOT be around when I retire (I’m only 34 now), so I don’t count it in retirement planning, not even as a “safety net.” I really really really WISH there was a way I could opt out of SS and keep and invest my own money!!

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