Social Security was created amidst the Great Depression to protect older Americans, who were no longer able to work, from poverty. The program is nearly 100 years old and is still a very important financial safety net for millions of people. Just over 75 million Americans are receiving some form of benefits from Social Security today. Social Security provides over half of the income for some 42% of the population receiving benefits, which means Social Security is the primary income for just over 31 million people in the US.
While Social Security may be less important the more you have invested for retirement, it can still be an important part of your retirement plan. Here’s how to think about Social Security as part of your retirement plan and estimate your future benefits.
Will I even receive Social Security?
There is some uncertainty regarding the future of Social Security, and many young people don’t expect to receive any benefits when they retire. However, cutting benefits is deeply unpopular and is one of the rare issues the vast majority of the country can agree on. 77% of Americans oppose any cuts to Social Security, and 83% have a favorable view of Social Security. The popularity of the program makes it more likely to be reformed rather than eliminated entirely.
When it comes to factoring it into your retirement plan, it’s best to be conservative but realistic. If you are nearing retirement and are only a handful of years away from receiving benefits, you have a much clearer picture of what Social Security will look like for you than someone who is 20 years old and over 40 years away from receiving benefits.
As you get closer to retiring, it certainly makes sense to include Social Security benefits in your calculations. If you are much younger, you may opt to include a conservative potential benefit amount, anticipating the possibility that benefits may be reduced in the future, or even not include it in your plan at all, if you would like to wait until you are older and have more clarity about what Social Security will look like in the future.
How can I estimate my benefits?
If you plan on including Social Security benefits in your retirement plan, how do you anticipate how much you will receive? The best way to estimate your benefits is by logging into the Social Security Administration website. Based on your work and income history, you can see your estimated benefits if you retire early, at full retirement age, or delay taking Social Security. The calculator allows you to enter a custom retirement age and to change your annual income (if you expect your income to decrease or increase in the future, that can affect the amount of benefits you will receive).
The numbers you see on the Social Security website are based on your income and work history, so this is the best and only way we suggest estimating your future Social Security benefits. However, if your income or age you draw benefits changes, that can change your benefit amount. Please revisit the Social Security website and recalculate your benefits if you experience changes to your income or anticipated retirement date.
How do I factor it in my plan?
The amount of Social Security income you expect to receive in retirement simply reduces the income you need from other sources, like your retirement accounts or pensions. For example, let’s say you anticipate you will need $10,000 per month in retirement to cover your expenses. Your estimated Social Security benefit is $2,500 per month. That means after Social Security, you will need $7,500 per month from other sources to cover the rest of your living expenses.
Should it change how I invest?
Social Security, and other defined benefit pension plans, can be thought of as a more conservative part of your retirement portfolio. This money is not invested and subject to the whims of the stock market and is instead a fixed stream of income. If Social Security and/or a pension plan will make up a significant part of your retirement income, it is worth speaking with a professional (like our great advisors at Abound Wealth) about how that should shape your retirement investments. It may allow you to take more risk in your investable portfolio if you know a significant portion of your retirement income is fixed.
Social Security and defined benefit pension income may not be subject to investing risk, but it is subject to being eroded by inflation. If inflation is a concern for your fixed retirement income, you may be able to make investment decisions in your retirement accounts to offset some of that inflation risk.
Social Security is usually an important component of your retirement plan. For those that haven’t done a great job investing for retirement, it may be their primary or sole source of retirement income. Even for those that have done a great job saving for retirement, Social Security benefits can still play an important role in retirement planning.
If you are closer to retirement, you likely have a better idea what Social Security benefits will look like for you. We suggest using the Social Security benefits estimate to get a number to factor into your retirement plan, and revisit if your income or anticipated retirement date changes. For those who are younger, the future of Social Security is more uncertain. With the popularity of Social Security, it may be unlikely it will disappear entirely, but it could look significantly different by the time you retire. Consider not including Social Security in your plan if you would like to be more conservative or using a more conservative estimation of your future benefits.
