If you are working and paying into the Social Security system, the Social Security Administration will mail you an annual statement. This statement contains a record of the reported earnings on which you have paid Social Security payroll taxes. It also provides an estimate of the retirement benefits you may receive as a result of those earnings. The statement is mailed to you approximately three months before your birthday beginning at age 25. Alternatively, you may request that a statement be mailed to you. The request may be submitted online, but you must wait to receive it in paper form.
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The annual Social Security Statement contains information that is helpful to people planning for retirement. In particular, it helps you answer three important questions.
1. Is your earnings history accurate? You should verify the accuracy of the earnings reported for your work history. To be eligible for Social Security benefits, you must have earned 40 work credits. You can earn a maximum of 4 credits in a year. Under current rules, you must have at least $4,480 in earnings to receive the maximum 4 credits. If you worked part-time during a year or full-time for only part of the year, it is possible that an error in reporting or recording your earnings could cost you one or more work credits. A careful review of your statement will tell you if that has occurred so that you can take action to correct the error.
The retirement benefit amount that you will receive is based on an average of your highest 35 years of earnings. If your earnings are under-reported, you could lose benefits that you would otherwise be entitled to. Your statement will tell you if that problem exists.
2. Can you survive on your estimated benefit? Many Americans derive most of their retirement income from Social Security. It’s unlikely they planned it that way. Your Social Security statement lists the dollar amount of your estimated benefit (in today’s dollars). Can you live on that amount? Probably not. What will you do to make up the difference? You are responsible for all the retirement income you will need above this amount. Face the hard truth in that statement and do something about it – starting now.
3. What will it cost you to retire early? Claiming Social Security retirement benefits at the earliest possible age (62) will cost us something, compared to waiting until full retirement age or later. Your Social Security statement will tell you what that cost is, in actual dollars. For example, I know from my statement that if I retire at age 62, instead of waiting until age 66, I will give up $653 in income every month for the rest of my life. It also tells me that claiming early at 62, instead of waiting until age 70, will cost me $1,490 each month. Understanding the cost of early retirement in real Social Security dollars is a powerful motivator. This is particularly true when you factor in the potential loss to a spouse who will depend on a survivor benefit.
Your annual Social Security Statement is a powerful retirement planning resource. Take advantage of it by carefully reading the statement and answering these three questions for yourself.
Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.