Surveys show that the majority of Americans expect that social security income will be a large factor in their ability to make ends meet during retirement. Do you know how much money you should expect to get when you claim social security? It could be a lot less – or maybe even more – than you expect. Understanding this level of income can have a drastic impact on your retirement planning. So, how do you estimate your social security income for retirement?

How much social security

Checking your social security records

The amount of money you receive from social security when you retire depends on the amount you’ve paid in over the years. The more you’ve paid in, the more income you are entitled to. Because future retirement benefits are tied to previous (and current) earnings, it is very important to make sure those records are correct.

Go create an account over at MySocialSecurity, which is a secure government-run website that will let you see your records. You can only create an account for yourself – not even for your spouse. But it is very easy to do and all you need to do is meet these four requirements:

  • Have a valid E-mail address,
  • a Social Security number,
  • a U.S. mailing address, and
  • be at least 18 years of age.

Your social security overview

After you create an account you will be taken to the main page and will be able to see your social security statement overview by default. The overview page gives a quick and easy glance into your estimated benefit at full retirement age, which for me is 67. Yes, you can claim before then, and you can even claim later for higher monthly benefits, but this quick view is for your full retirement age.

You should also see a dollar amount below that which reflects your last reported earnings. This is the amount of money the social security administration shows that you earned during the last calendar year. Is that number right? Errors don’t happen a lot, but they do happen. Don’t get cheated out of future earnings because of a clerical error.

Also on this overview page are the options to print a full social security statement or to download all the social security data in a spreadsheet format. Unless you are really a finance geek (like I am), you probably will never need to download your data.

Social security estimated benefits

The next tab is the estimated benefits tab. Clicking here will show you the estimated benefits based on three different retirement ages. 1. Your full retirement age (again, for me this is 67). 2. Age 70, which is the age which gives the maximum monthly payment to you. 3. Your “early retirement” age, which for me is age 62. That doesn’t sound “early” to me, but that’s what the social security department believes.

Lower down on this page it shows you how much in social security benefits you could expect were you to become disabled prior to reaching your full retirement age. Even lower it shows how much money your spouse and/or child(ren) might qualify for if you were to die this year. A bit morbid perhaps but it is good to know that the benefits you paid are not necessarily lost, and that your family might get help from these benefits.

By the way, are you curious how social security benefits are calculated? Here’s a document that the social security administration provides that explains the formula used. It’s basically based off the 35 years in which you earned the highest wages and then some calculations are done on that total.

Your earnings record

The next tab is your earnings record. This shows what the social security administration has recorded as your income in previous years. Note that there is a maximum amount that gets taxed for social security purposes. Because of this, the amount shown in the “taxed social security earnings” column might not be the same as what you earned that year. For example, in 2014 Americans were taxed on the first $117,000 of earnings. Someone who earned more than that will still show just $117,000 in that column.

Taxed Medicare earnings is the second column. Since there is no maximum tax limit on medicare, this number should accurately reflect the amount of income you earned in each specific year.

Just a bit lower it shows the total amount of social security taxes you have personally paid, and how much your employers have paid toward your account. It will also show Medicare taxes – again paid by you and also by your employers.

The last tab on the page isn’t very interesting. It just shows how you can request a replacement social security card in case you lost yours.

What should you do with this information?

Now that you know how much money you are likely to get back from social security, you can use this as part of your retirement planning.

First though, you need to have a budget. Why? Because this will clearly show your current cashflow so you know what you are spending to maintain your current lifestyle. Sure your lifestyle will have some changes in the future as you age, but having a current budget as a starting base is important. Taking your current budget think about what things you want to be different in retirement. Do you plan to travel more? Will you have your mortgage paid off? Might you move to a different area with a higher – or lower – cost of living? Take some time to think about these things then make adjustments to your cash flow plan. This will show how much you need in today’s dollars to support your retirement lifestyle.

Do some simple math

With the updated cashflow planning estimate, subtract the amount of money you expect to get from social security at whatever age you plan to retire. If you are married be sure to estimate and use the benefits expected for both you and your spouse.

What’s left after subtracting social security? That’s how much additional you will need in income. That can be through continued employment or use of retirement savings and investments. If you hope to supply this income from investments, you can use the “4% rule” to estimate how much in total investments you need. The “4% rule” states that if you draw no more than 4% of your investments you have an extremely high chance of outliving the money. Let’s say you need $30k annually from investments to supplement your retirement lifestyle. Using the 4% rule you can take that 30k and multiply it by 25 -> giving an estimated $750,000 of required retirement investments.

Getting from here to there

The difference in however much you have in investments today and the amount you need in retirement gives an idea of your current shortfall. Depending on how far you are from retirement, this might be easy to make up – or not. Note that these estimates are based on “today’s dollars” so you need to take into consideration some sort of estimated inflation rate.

A financial coach can help you walk through all of these estimates. We can also help fine-tune the numbers to take into account things like inflation. Another important task is estimating returns for your investment portfolio based on your current holdings. Taking the time to do planning today can help assure enjoying your retirement years without stressing over making ends meet. Want to schedule a chat with a coach? Just reach out to us and we’ll arrange time to talk.

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