To save money, the Social Security Administration stopped mailing annual Social Security statements to workers this year. These four-page mailings gave workers a personalized estimate of their expected Social Security payments based on their actual earnings history. Now workers will have to go online to get this estimate, and only some of the information provided in the statements is available online. Here's a look at how to predict how much you will get from Social Security in retirement.
Consider the averages. In June 2011, the average Social Security benefit was $1,180.80 per month. The maximum possible benefit for a worker retiring at age 66 in 2011 is $2,366. But to get this amount, the worker would need to earn the maximum taxable amount, currently $106,800, each year after age 21.
Familiarize yourself with the formula. Social Security benefits are calculated based on your 35 highest-earning years in the workforce, and are adjusted for inflation. If you don't have 35 years of earnings, zeros are averaged in for the years you didn't work at a job in which you paid into Social Security. The proportion of your income that is replaced by Social Security varies based on how much you earn. Consider a worker who turns 62 in 2011. To calculate his benefit, the first $749 of his average monthly earnings is multiplied by 90 percent, the next $3,768 by 32 percent, and the remainder by 15 percent. The sum of these three amounts equals his initial monthly payment amount. Workers also have cost-of-living increases added to their benefit beginning at age 62, even if they don't begin to receive benefits until a later year.
Try different retirement dates. The date you first sign up for benefits also has a large impact on how much you will receive. "The biggest effect you can have on your benefit is when you claim," says Steve Sass, a research associate at the Center for Retirement Research at Boston College. You won't get the full amount you are entitled to unless you wait until your full retirement age, which for most workers is age 66 or 67. Your payout will be reduced if you claim early, and increase if you postpone collecting your payments. For example, a worker entitled to $1,000 per month at age 66 would get 25 percent less, or $750 per month, if he signed up at age 62. However, if he waited until age 70 to collect, he would get $1,320 per month, 32 percent more. There is no additional benefit for delaying claiming beyond age 70.
Married couples have additional options. Married couples are entitled to benefits based on their own work record or up to 50 percent of the higher earner's benefit, whichever is higher. A spouse may also be eligible for a survivor's benefit when the higher-earning spouse passes away. "There are a lot more options for spousal benefits when you wait, at a minimum, until full retirement age," says Jean Setzfand, vice president of financial Security at AARP. "People are eligible at 62, but there is a hidden bonus when you wait until full retirement age because it opens up a range of options that aren't available to you before that point in time." For example, dual-earner couples who have reached their full retirement age may be able to claim spousal benefits and then later switch to payments based on their own work record, which will then be higher due to delayed claiming. Spousal benefits are reduced if claimed before full retirement age. You can also claim on an ex-spouse's work record if the marriage lasted at least 10 years.
Subtract likely Medicare premiums. Many retirees have their Medicare Part B premiums for doctors' services and outpatient care deducted from their Social Security checks. The premium for most new Medicare beneficiaries in 2011 was $115.40 per month. Medicare Part B premiums are prohibited by law from rising faster than Social Security cost-of-living increases for existing Social Security recipients.
Easier ways to crunch the numbers. Workers can get an estimate of their likely Social Security benefits using the Social Security Administration's retirement estimator tool. "If you want the most accurate information, the place to go is to Social Security because they are pulling from your work record," says Setzfand. However, the tool doesn't include benefits you may be eligible for based on a current or former spouse's record or subtract Medicare premiums. AARP's Social Security benefits calculator further allows you to factor in potential spousal benefits, so spouses can make decisions about how to maximize their benefit as a couple. And Boston College's retirement calculator allows you to estimate how far your likely Social Security benefits, savings, pension, and home equity will go toward meeting your retirement expenses. Each of these calculators gives you an estimate of how much you will receive at various claiming ages based on certain assumptions about inflation and future salary growth. But if your income changes significantly from year to year, you may not get an accurate representation of how much you will actually get.