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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Social Security Myth

Dollars becoming Euros

The government has been robbing the Social Security Trust! Most of us have heard this version of Social Security history.  Is it true?  Myth is a more correct answer.

Social Security’s history includes details of social movements taking place long before the Act became law in the 1930’s. The movements focused on providing some level of income security for individuals who aged out of the workforce.

Two decisions – both made at the time the bill was written – explain part of how the Social Security Trust Fund was diminished:

  • Benefits were earned when a worker had made three years of contributions prior to reaching the age of 65. BUT – to be fair to workers who would not be able to make three full years of contributions prior to their 65th birthday, the legislation granted them annual payments as well.  In the period 1937 to 1939, this annual payment resulted in a payout of $25,562,000. The actual amount paid out is larger as the payments would have continued until death.  
  • Social Security was also set up as a “pay as you go” program.  What came into the fund was paid out. Ida Mae Fuller is the first person to apply for and receive a monthly benefit. She contributed a total of $24.75 in the three years prior to reaching her 65th birthday. Her first benefit check was $22.54.  Because she lived many years past age 65, Ms. Fuller’s $24.75 investment yielded a total retirement benefit of $22,888.92.  Part of her payment would have come from new contributions and part from income earned from the excess deposits.

Social Security never achieved the trust fund it needed to give it stability. Benefits paid to American retirees in the early days of the program were far in excess of the contributions.  Legislative changes expanding benefits and building in cost of living adjustments have continued to keep the fund from building a sufficient cash reserve that would generate earnings to sustain long term benefits. 

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Your Biggest Financial Decision

What’s the biggest financial decision you’ll ever make? Going to college? Buying a house? Maybe, but it may also be true that the biggest financial decision is the decision about when to claim Social Security. And that is a decision where you’ll hear people give opposite advice – some will recommend claiming early, and others encourage you to wait.

Because it’s a big decision, it’s worth exploring your options carefully using readily available online tools. Tool #1 is well-known, but read on to tool #2, as well, because it offers a bonus.

Tool #1: Set up your account at www.socialsecurity.gov and check out your options. Notice how your monthly Social Security income changes depending on your age at claim. You’ll notice that it’s not just what year, but also what month, that matters. For example, if you turn 67 in November, but really don’t have any plans until summer, working an extra 5 or 6 months will give you a higher monthly income.

Tool #2: Check out the Social Security Estimator from the Consumer Financial Protection Bureau (CFPB).  Although this tool is not personalized to your individual history of work and earnings, it does something the Social Security tool does not. It shows the cumulative impact of your decision about when to claim. 

Here’s how the CFPB tool works: You enter your birthdate, and type in how much has been your highest annual earned income in your career. Based on that, it estimates what your social security retirement benefit would be at your full retirement age, and at other ages between 62 and 70. When you select an age, it shows what your monthly income will be, AND (in the left margin) it shows the total amount you will receive from Social Security if you live to the average life expectancy of 85.

graphic depiction of output described.
Combined graphic showing calculator results at ages 62 and 70

I ran an example for a person born in 1960 whose highest earning level was $50,000/year. If they claimed at age 62 and lived till age 85, they would receive a monthly benefit of $1,112 and would have received a total of $305,800 from Social Security during their life. By contrast, if they claimed at age 70 and lived to age 85, their monthly benefit would be $1,958 and their total by age 85 would be $352,440. Note: all these figures would actually be higher, because of adjustments for inflation.

There is no “right” age to claim Social Security; your choice depends on your situation – your needs, other sources of income, health situation, and more. But using available tools, including the CFPB calculator which enables you to easily see the total impact of your decision at age 85, will help you make a well-informed decision. Find more retirement planning information our retirement resource page.

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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Social Security Matters – at any age

April is National Social Security Month.  It’s really fitting that they chose April, because April is also Financial Literacy Month.  And understanding your Social Security situation is an important part of Financial Literacy.

If you’re under 40, you may be surprised to consider that you need to pay attention to Social Security. (Even some people under 60 may be surprised at that idea!).  Now I’m not suggesting you need to fully understand Social Security – that’s a tall order.  But you do need to be aware of your own social security record and what it means.

The key your record is found at my Social Security.  Here you can activate your own on-line account so that you can log in any time; this lets you verify the accuracy of your earnings record, learn what you can expect in retirement or disability benefits, order a replacement social security card, and more.

Why it matters. On average, Social Security replaces approximately 40 percent of pre-retirement earnings. To enjoy a comfortable retirement, most people will also need income from other sources — like pensions, savings, and investments. Understanding your social security projections can help you make informed plans for your own retirement.

Throughout the month of April, the Social Security Administration will boost its outreach through traditional media and social media, including a Facebook Live Chat:

Social Security will participate in a Facebook Live Chat, hosted by USA.gov, on April 20, 2017, at 7:00 p.m. ET. The public may ask questions via livestream about the “5 Steps Toward Financial Security.”

To participate, follow USA.gov and Social Security on Facebook.

NOTE: some young adults may be skeptical, questioning whether Social Security will still be around by the time they retire.  While Social Security will likely change over the next 2-4 decades, you will not find any experts who believe it will disappear.  Understanding your situation under current law will help you understand policy changes as they are proposed and enacted.  No matter your age, it’s smart to activate your Social Security account and see what it tells you.

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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Social Security Retirement Estimator

When you think about great on-line tools, Social Security may not be the first source that comes to mind — but they really do have great tools.   Here’s one that is useful to all adults as they plan for retirement (and I don’t mean when you turn 60!  By your early 30’s, it’s generally time). I encourage you to check out the Retirement Estimator.

The Retirement Estimator is an easy way to get an instant, personalized estimate of your future Social Security benefits. Just key in some basic information and the Estimator will use information on your Social Security record, along with what you input, to give you a benefit estimate on the spot. You even can experiment with different scenarios, such as changing your future earnings and retirement date. Check it out at www.socialsecurity.gov/estimator

(It’s also available in Spanish at www.segurosocial.gov/calculador)

It’s easy and safe, and it’s an important step in making sure you’ll be ready when retirement rolls around!

– Barb

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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