"Your Social Security Statement" is an annual update showing how much you're entitled to in the way of benefits when you retire. The Social Security Administration begins mailing this update early in your working life.
It's a very useful document and a great aid in financial planning. The agency also periodically produces sample benefit calculations that help people understand how much of their retirement needs are likely to be covered by Social Security.
A recent set of illustrations from the agency reflects what it calls a "full-lifetime average earnings level." This is a person's 35 years of highest earnings, indexed for wage inflation, with the assumption that they survive at least to age 65 without becoming disabled.
Its samples use full-lifetime annual averages of $10,000, $20,000, $30,000, $40,000, $50,000 and $60,000. They also use what the agency calls the "steady maximum" employee, who began working at age 22 and earned at least the maximum amount of earnings each year on which Social Security taxes (called Old Age, Survivor and Disability Insurance) are due.
While those nearing retirement have a good idea of their lifetime earnings, younger workers often do not. The agency's illustrations can provide a useful look at possible benefit levels.
Because Social Security benefits are indexed for inflation, it's appropriate to look at current price levels and spending to determine how much of your future needs would be covered by Social Security. For example, if the benefits shown below covered 40% of your current spending needs, it's not a stretch to figure they also would equal about 40% of your future spending needs. You need to do some adjusting for a different retirement spending profile.
Even with Medicare, your medical expenses might be higher, but your housing expenses might be lower if you've paid off your mortgage. Some experts say you can live on less -- 70% to 80% of your income at retirement is a popular range. A more prudent suggestion is to assume your retirement spending will be 100% of its earlier level. If you're wrong, you can enjoy the windfall.
