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?