If you’re serious about crafting a solid retirement plan you’ll need to learn how to read your Social Security statement, which documents your earnings history and your future benefit estimates.
What do you need to know?
Get your statement
First off, you need to get your statement. And to do that, you’ll need to create a “ my Social Security .” Now, the Social Security Administration will mail you your statement when you’re 60 if you haven’t created a “my Social Security” account. But that’s far too long to wait to learn how much you can expect to receive from Social Security.
“Everyone needs this statement,” said Andy Landis, author of “Social Security: The Inside Story.”
“It’s the foundation of all your retirement planning. You’ve got to get this — today. You review your bank balance and investment statements,” Landis said. “Why would you ignore one of your largest assets — your inflation-proof Social Security?”
How to read your statement
Next, you must learn what all the numbers on your statement mean and, equally important, don’t mean. And, to understand your statement, you need to know the assumptions used, said Landis. (You can view some sample statements here .)
Estimated benefits: Your estimated benefits are just that, estimates. And those estimates are based on “your current earnings rate.”
In essence, the Social Security Administration takes the last year of earnings posted to your statement and projects it forward all the way to the ages shown in the estimates, said Landis. “It’s OK that your future work isn’t inflated, because the estimated benefits are in today’s dollars anyway,” he said. “Your actual future work could be quite different.”
And if that’s the case, Landis recommends using Social Security’s “ Estimator ” tool where you can specify various future earnings estimates.
Also worth noting is that your estimated benefit assumes that you will continue to work until your full retirement age or FRA and your wages will continue to increase every year for a cost-of-living estimate, said Mantell.
So, if you quit working before your FRA, your benefit may be lower than the current estimate, she said
Today’s dollars: As noted, your estimated payments are not inflated. “I like that because they’re stated in today’s buying power,” said Landis. “I can relate to current dollars much better than an amount that’s been inflated into future dollars. Your actual payment will be larger, because it will be in future dollars, but it will have about the buying power of the estimate on the statement.”
There is, however, one problem with using today’s dollars as the estimated benefit. The further you are from your FRA, the less accurate the estimate will be, said Marcia Mantell, author of What’s the Deal with Social Security for Women.
It’s also worth noting that financial planners, when building a retirement-income plan, will often start by reducing your estimated Social Security benefit from the amount of income you expect to need in retirement in today’s dollars before making adjustments for investment returns, savings rates and the like.
What the estimates don’t tell you
There’s plenty that your statement doesn’t tell you as well, said Mantell. “Your Social Security statement is just about the most important tool you have to start planning for retirement income,” she said. “But use caution! You don’t want to use the estimates that you see.”