Improve Retirement Readiness by Being Realistic About Social Security

We already know that the average American is financially under-prepared for retirement, putting them at risk for lifestyle cutbacks and even hardships in retirement. A recent study (University of Michigan Retirement and Disability Research Center) showed:

  • that having unrealistically high expectations for Social Security benefits contributes to inadequate retirement savings; and
  • that the majority of workers over-estimate what they will receive in Social Security retirement income.

Those two findings combine to suggest trouble ahead. And it doesn’t take TOO much thought to reach the conclusion that everyone needs realistic expectations about Social Security income in retirement. The good news? It’s pretty easy to obtain a reasonable estimate of your Social Security income!

The Social Security Administration offers two excellent tools we can use to obtain a good estimate of what our Social Security retirement benefit will be. Both involve entering personal data, so be sure to use a secure internet connection. The Retirement Estimator provides a personalized estimate of your benefit at three ages: 62; your full retirement age (which is between age 66 and 67); and age 70. By logging into your “My Social Security” account on-line, you can see even more: you can pick a precise age at which you wish to claim social security, rather than being limited to just three options, AND you can review the earnings record shown there to make sure that all your earnings are included. Note: about a month ago I talked with a woman whose record was missing her earnings for 2018 and 2019! It’s a good thing she checked! Without those figures, her Social Security income would have been lower than what she was supposed to receive.

Suppose you discover that your Social Security income is projected to be about $2,000/month (in today’s dollars). Then you can consider: do you want to live on $2,000/month after you retire? If you’d rather have more income to live on in retirement, that’s motivation to save and invest now! To get started, learn about retirement saving options available through your employer: if a 401(k) or other tax-advantaged plan is available to you, that can be a great option. If your employer will match your contributions to a retirement account, then be sure to take advantage of that match, as well.

For those who do not have a retirement savings option available through their job, be sure to check out your Individual Retirement Account (IRA) options. The IRS Publication 590A explains the rules associated with contributing to an IRA account. You may choose to consult with a financial adviser in deciding how to invest those funds – an IRA can be invested in any type of financial account, including mutual funds, a stock and/or bond portfolio, and money market accounts. Your choice of investments, along with your decisions about how much to save, will have a huge impact on your retirement well-being. The Financial Industry Regulatory Authority (FINRA) offers great learning materials for learning to invest and for choosing financial professionals.

Sources: Squared Away Blog: Workers Overestimate their Social Security, 6-17-21, from the Center for Retirement Research at Boston College; and
Prados, María J., and Arie Kapteyn. 2019. Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement, University of Michigan Retirement and Disability Research Center.

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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