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If you’re serious about crafting a solid retirement plan you’ll need to learn how to read your Social Security statement, which documents your earnings history and your future benefit estimates.
What do you need to know?
Get your statement
First off, you need to get your statement. And to do that, you’ll need to create a “my Social Security.” Now, the Social Security Administration will mail you your statement when you’re 60 if you haven’t created a “my Social Security” account. But that’s far too long to wait to learn how much you can expect to receive from Social Security.
“Everyone needs this statement,” said Andy Landis, author of “Social Security: The Inside Story.”
“It’s the foundation of all your retirement planning. You’ve got to get this — today. You review your bank balance and investment statements,” Landis said. “Why would you ignore one of your largest assets — your inflation-proof Social Security?”
How to read your statement
Next, you must learn what all the numbers on your statement mean and, equally important, don’t mean. And, to understand your statement, you need to know the assumptions used, said Landis. (You can view some sample statements here.)
Estimated benefits: Your estimated benefits are just that, estimates. And those estimates are based on “your current earnings rate.”
In essence, the Social Security Administration takes the last year of earnings posted to your statement and projects it forward all the way to the ages shown in the estimates, said Landis. “It’s OK that your future work isn’t inflated, because the estimated benefits are in today’s dollars anyway,” he said. “Your actual future work could be quite different.”
And if that’s the case, Landis recommends using Social Security’s “Estimator” tool where you can specify various future earnings estimates.
Also worth noting is that your estimated benefit assumes that you will continue to work until your full retirement age or FRA and your wages will continue to increase every year for a cost-of-living estimate, said Mantell.
So, if you quit working before your FRA, your benefit may be lower than the current estimate, she said
Today’s dollars: As noted, your estimated payments are not inflated. “I like that because they’re stated in today’s buying power,” said Landis. “I can relate to current dollars much better than an amount that’s been inflated into future dollars. Your actual payment will be larger, because it will be in future dollars, but it will have about the buying power of the estimate on the statement.”
There is, however, one problem with using today’s dollars as the estimated benefit. The further you are from your FRA, the less accurate the estimate will be, said Marcia Mantell, author of What’s the Deal with Social Security for Women.
It’s also worth noting that financial planners, when building a retirement-income plan, will often start by reducing your estimated Social Security benefit from the amount of income you expect to need in retirement in today’s dollars before making adjustments for investment returns, savings rates and the like.
What the estimates don’t tell you
There’s plenty that your statement doesn’t tell you as well, said Mantell. “Your Social Security statement is just about the most important tool you have to start planning for retirement income,” she said. “But use caution! You don’t want to use the estimates that you see.”
Why not?
For one, the statements don’t reflect the fact that your Medicare Part B premium will be automatically deducted once you’ve enrolled in both Social Security and Medicare. So, for instance, the monthly Medicare Part B premium in 2021 is $148.50 and the average monthly Social Security benefit was $1,543. That means, your “take-home” benefit would be $1,394.50.
What’s more, the statements don’t reflect the income related monthly adjustment amount or IRMAA that applies to Part B premiums. About 7% of high income Medicare beneficiaries pay more than $148.50 a month for Part B. Read
And the statements don’t reflect the impact of the windfall elimination provision or WEP and the government pension offset or GPO.
If you have work where you did not pay Social Security taxes, such as foreign or certain government work, your future payments could be smaller than estimated because of WEP or GPO reductions.
“Your statement just isn’t smart enough to do WEP and GPO computations,” said Landis.
You can calculate how much you’ll be affected by WEP and GPO at this website.
Are you a high earner?
If you’re a higher earner, your earnings history can look incorrect, said Mantell.
That’s because there’s a limit on the amount of earnings on which you pay Social Security taxes each year. The limit, which is $142,800 for 2021, increases yearly. And earnings above the limit will not appear on your earnings chart as Social Security earnings.
“It can look like your earnings are too low,” said Mantell.
Correcting mistakes
The SSA recommends that you check your statement carefully to be sure it shows the correct amount you earned each year and to make sure your name and date of birth are correct.
And, if after reviewing your statement, you discover earnings missing from your record, the first thing you should do is find some proof of those earnings, such as a W-2 or tax return, according to the SSA.
After you’ve gathered your documents, contact Social Security at your “my Social Security” account or calling 1-800-772-1213 or the TTY number, 1-800-325-0778.
Note: This process could take some time, depending on the information you bring to the SSA about your missing earnings.
It’s also worth noting that there is no statute of limitations on how far back Social Security will go to correct a prior wage error, said Kurt Czarnowski, a principal with Czarnowski Consulting. “However, the further in the past that the error occurred, the less likely it is that the person may still have proof of what the correct amount was,” he said. “That’s why it’s so important to periodically check one’s earnings record, because the more recently the error occurred, the more likely it will be that the proof of the proper amount will be available and easily accessible.”
Don’t forget about the words
Landis also recommended reviewing the last page of your Social Security statement. “It’s a pretty good summary of how Social Security works, and you might learn about a benefit you didn’t know you — or your family — could get.”
Your adviser may be calling
One last note. It’s quite possible that your financial adviser might want to discuss your Social Security statement with you when next you speak with them.
That’s because Jeffrey Levine, the lead financial planning nerd at Kitces.com, recently wrote an article encouraging advisers to broach the subject with clients. “A client’s Social Security statement can provide an adviser with valuable information, help clients to better understand their future potential Social Security retirement benefits (or fix their projected benefits if historical earnings are missing), and serve as a launching point for deeper conversations with the client to explore how they can meet their financial planning goals,” wrote Levine.
