You May Get $35,000 More From Social Security Than You Think
The agency's benefit estimates rely on two wrong assumptions
(This article previously appeared on aboutLife.com.)
My friend Frank is prepared. He has been saving for retirement since he had his first job. He knows all about IRAs and 401(k)s and can deliver quite an impressive speech on the state of his brokerage accounts.
So, when I asked Frank if he knew how much he would have when he retired, I was surprised that he overlooked one big source of income: Social Security. He knew he was paying his Social Security taxes, but he didn’t have a clue what his Social Security benefits would be when he retired.
Social Security makes up 60 percent of retirement assets for the average American couple. The Social Security Administration projects that couple will receive $1,627 a month for 22 years. That’s a hefty $430,000 in Social Security benefits over a lifetime.
You may be asking yourself: How did I not know this? Most of us don’t and it’s partly because budget cuts have forced the Social Security Administration to stop sending everyone annual statements. You can expect to get a statement in the mail every five years. But you don’t have to wait that long; register online on the Social Security Administration website to see your statement at any time.
When I told Frank about this, he went from being puzzled to delighted as he recalculated his retirement income. But we weren’t done. I told Frank his new calculation was off ... by about $35,000 … but in the right direction.
The average American underestimates his or her Social Security benefit by about $35,000. The challenge is in the calculation, which relies on two inaccurate assumptions:
Inaccurate assumption No. 1: The basic level of benefits increases with inflation
Inaccurate assumption No. 2: Your salary remains the same … forever
Let’s take them one at a time.
Inaccurate assumption No. 1: The basic level of benefits increases with inflation When the Social Security Administration creates your statement, it starts with a calculation of what your benefit would be today. Next, using the inflation rate, the agency forecasts what your benefit will be in the future when you retire. However, when it’s time to claim your Social Security benefit, the actual amount as a new retiree will be based on your average wage at the time of retirement, not on inflation. (Once the initial benefit has been calculated, subsequent increases are pegged to inflation.)
Where $35,000 goes missing is that average wages have been increasing faster than inflation.
Every year, the Social Security Administration looks at all our tax returns to determine the national average wage. Since 1951, the average wage has outpaced inflation by almost 1 percent per year. That may not sound like much, but over time it adds up.
Because of inflation, prices are about nine times higher today than in 1951. But average wages are 16 times larger today than in 1951.
Inaccurate assumption No. 2: Your salary remains the same … forever When it’s time to claim your Social Security benefit, the actual amount will depend on your earnings over your lifetime. The Social Security Administration’s benefit forecast assumes that your wages will remain the same until you retire. We know that’s not true.
Most Americans expect their income to increase as they gain work experience or get promoted.
In short, your retirement benefit is being underestimated and you can expect to see more dollars in your Social Security account.
In fact, the Social Security Administration itself commissioned a study that found this same issue with its calculations. The average American gets a benefit estimate that’s short by about $185 per month. That’s more than $35,000 over a lifetime.
For a more accurate estimate of your Social Security benefit, check out the free Social Security Calculator on aboutLife.