At 62 years old, John Smith, who resides in Salt Lake City, has been actively setting aside funds for retirement. He recognizes the importance of Social Security benefits in securing his financial future, yet he remains uncertain about integrating them into his retirement strategy. To seek clarity, Smith opts to visit the Social Security office in his area.
During his visit, the personnel informed him that, typically, Social Security benefits cover approximately 40% of an individual’s income before retirement, provided that they begin to receive these benefits when they reach their full retirement age. Mari Adam, a certified financial planner, commented, “Replacing that benefit requires a significant amount of money. For a married couple anticipating $40,000 annually from Social Security, they might need around $1 million in assets to substitute that income, presuming a withdrawal rate of about 4% from their investment portfolio.”
Smith discovers that he can obtain a projection of his future benefits through the Social Security Administration (SSA) based on his earnings throughout his career thus far.
Nonetheless, he is cautioned that such projections are not set in stone. Shai Akabas, the executive director of the economic policy program at the Bipartisan Policy Center, stated, “Social Security is here to stay. It ranks as one of the most cherished government programs, and politicians generally shy away from altering it.
While adjustments to benefits will occur as they have in previous years, the program will persist.”
Smith is advised to utilize the current Social Security benefit projections for his retirement planning, particularly since he is nearing retirement age. He may also consider using a more conservative estimate of 83% or even 50% of the anticipated benefits to factor in any possible future adjustments.
Calculating Social Security Benefits
In order to bolster his retirement nest egg, Smith thinks about extending his work life and postponing his Social Security claim until he turns 70, which would yield a higher benefit. He might also boost his contributions to his 401(k) or Roth IRA or accelerate his mortgage payments. For further assistance, Smith seeks out AARP Utah, which offers abundant online resources and arranges events to help individuals understand the complexities surrounding Social Security.
He intends to attend an upcoming online seminar on October 8, 2024, that will be available via Facebook and YouTube. Smith also gains insights into the details of how Social Security retirement benefits are computed. A Social Security retirement benefit is derived from a percentage of one’s average monthly income based on the highest 35 years of earnings adjusted for inflation.
The Social Security Administration assesses an individual’s earning history, identifies the highest 35 years (which do not need to be sequential), and adjusts each year’s earnings for inflation. They then tally up the inflation-adjusted earnings from the highest 35 years, divide that figure by 420 (the total number of months in 35 years) to ascertain the average monthly income, and apply a sophisticated formula that differs according to the year of birth to find the benefit amount. Though the process is complex, Smith is encouraged not to be overly concerned with the specifics and to allow the SSA to handle the calculations on his behalf.
To ascertain his Social Security benefits, he can navigate to www.socialsecurity.gov and select the “Plan for retirement” link located on the main page. With this newfound knowledge, Smith is empowered in his retirement planning and is in a better position to make well-informed choices regarding his financial future.
