How to Estimate Your Social Security Benefits

An often overlooked component of retirement planning is Social Security. It’s not that no one knows it’s there – but more that getting reliable estimates of your benefits is something of mystery. In addition, many people believe that Social Security will become “bankrupt,” so they try not to rely too heavily on it as a source of future income.

Maybe this is just my thought on the bankruptcy issue, but it will be virtually impossible for Social Security to go bankrupt in a vacuum. If Social Security becomes bankrupt, then so is the entire U.S. government. If that is the case, the economic and financial world as we know it will be completely gone. That will probably also include your IRAs and 401(k) plans as well!

Social Security will have to be there no matter what, so we may as well consider it in planning our retirements.

Importance of Social Security Benefits

The average Social Security benefit per retiree is $1,230 per month, while the maximum benefit is $2,513 per month.

Even if you are aggressively preparing for your retirement, it is likely that Social Security benefits will still represent a substantial percentage of your retirement income. In addition, many millions of Americans have no other retirement provisions at all, and still more have provisions that are generally inadequate. For most Americans then, Social Security will be a critical component of their survival in retirement.

How dependent are Americans on Social Security income in retirement? The Social Security Administration provides the following statistics:

• Nine out of ten individuals age 65 and older receive Social Security benefits.
• Social Security benefits represent about 39% of the income of the elderly.
• Among elderly Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.
• Among elderly Social Security beneficiaries, 23% of married couples and about 46% of unmarried persons rely on Social Security for 90% or more of their income.

How to Estimate Your Social Security Benefits

Since most of us will be relying on Social Security for a significant part of our retirement income, it’s important to have at least a rough idea as to how much our benefits will be when the time comes. You can determine this by using the Social Security Administration’s Retirement Estimator.

The estimator enables you to calculate what your Social Security income will be at any time, and it only takes a few minutes to do it. At a minimum, this will help you to determine how much income you’ll need from other sources, including your retirement portfolio.

But the estimator does more than just letting you know what your benefit will be – it also allows you to run different scenarios based upon various retirement ages and future income projections. Though the Social Security Administration is pretty vague in releasing details on the formula that it uses to calculate benefits, the tool will enable you to do this yourself using the administration’s own system.

When you go to the estimator page, you will be asked to provide certain information, including:

• Your name.
• Your Social Security number.
• Your date of birth.
• The state you were born in.
• Your mother’s maiden name.
• An estimate of your income for the most recent year.

With this information the Social Security Administration will be able to pull up your previous earnings history and all other information they have to date.

From that screen – and after you agree to abide by the site’s waivers and disclaimers – you will get your estimate of benefits based on your earnings history. After that, you can move to a different screen, that will enable you to revise your retirement age and future earnings projections. In that way, you can get more specific benefit estimates that are tied to different retirement assumptions that you want to run.

For each change in assumptions, the estimator will give you benefits based on four retirement dates: at age 62, at your normal retirement age (67 for those born after 1960), at age 70, and the age you select. You will find, for example, that your benefit will be about 24% higher if you delay collection of benefits from age 67 to age 70. That’s good information to have if your retirement plans aren’t quite where they need to be.

The Missing Social Security “Annual Earnings and Benefits Statements”

You may be wondering why you even need to go to the Social Security Administration website to get a projection of your benefits. Why not just wait to receive your Annual Earnings and Benefits Statements that will give you the most up-to-date information?

Those statements were popular, but unfortunately they’re gone. The Social Security Administration eliminated them in March of 2011 as a result of budget cuts.

In addition, while the statements did provide a fairly accurate estimate of future benefits based on earnings to date, they did not give you the capacity to project what your benefits will be based on higher future earnings. The Retirement Estimator will allow you to do exactly that.

Have you gotten a recent estimate of your Social Security benefits? Leave a comment!

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

All posts by Kevin Mercadante