John Smith, a 62-year-old Salt Lake City resident, has been diligently saving for retirement. He knows Social Security benefits will be crucial to his financial security, but he’s unsure how to factor them into his retirement planning. Smith decides to visit his local Social Security office to get some answers.
The staff there explained that, on average, Social Security benefits replace about 40% of a person’s pre-retirement income, assuming they start collecting at their full retirement age. “It takes a lot of money to replace that benefit,” says Mari Adam, a certified financial planner. “If a married couple expects to get $40,000 a year from Social Security, it could take $1 million in assets to replace that benefit, assuming you plan to withdraw roughly 4% annually from your portfolio.”
Smith learns that he can get an estimate of his future benefits from the Social Security Administration (SSA) based on his average career earnings to date.
However, he’s cautioned that these estimates may change. Shai Akabas, executive director of the economic policy program at the Bipartisan Policy Center, says, “Social Security is not going away. It is perhaps the most popular government program and one politicians are reluctant to touch.
Benefits will be adjusted in the future as they have in the past, but the program will endure.”
Smith is advised to use the current Social Security benefit estimates for his retirement planning, especially since he’s within a decade of retiring. He could also assume a more conservative estimate of 83% or even 50% of the promised benefits to account for potential future changes.
Estimating Social Security benefits
To shore up his retirement savings, Smith considers working longer and delaying taking Social Security until age 70, which would result in a larger benefit. He might also increase his 401(k) or Roth IRA contributions or pay his mortgage faster. For additional support, Smith turns to AARP Utah, which provides a wealth of information online and organizes events aimed at helping individuals navigate the complexities of Social Security.
He plans to attend an upcoming online event on October 8, 2024, via Facebook and YouTube. Smith also learns about the intricacies of how Social Security retirement benefits are calculated. A Social Security retirement benefit is a percentage of your average monthly income using your highest 35 years of inflation-adjusted earnings.
The Social Security Administration looks at your earnings history, pulls out your highest 35 years (which don’t have to be consecutive), and indexes each year of past earnings for inflation. They then add up your highest 35 years of inflation-adjusted earnings, divide by 420 (the number of months in 35 years) to get your average monthly income, and apply a complex formula that varies depending on your birth year to determine your benefit. While the formula is intricate, Smith is advised not to worry too much about the details and to let the SSA do the calculations for him.
To find out his Social Security benefit, he can visit www.socialsecurity.gov and click on the “Plan for retirement” link on the homepage. With this knowledge, Smith feels more confident in his retirement planning and is better prepared to make informed decisions about his financial future.
