Did you know that the benefit amounts shown on your social security statement may be incorrect? The reason for this is that every statement merely provides an "estimate" of your potential benefit amounts. They do not show your guaranteed benefit amounts or even your minimum benefit amounts. Just estimates.
The Social Security Administration, as detailed in your statements, records your historical earnings record from data they obtain from your tax returns. They then calculate your benefit amounts based on your "highest 35 years of averaged indexed monthly earnings (AIME)". To do so they look at your actual earnings history and then "estimate" your future earnings by taking your last full year of earnings and use that value as your projected annual earnings until you reach age 70.
In addition, they do not index your earnings for cost of living (COLA) after your age 60, even though they will do so when you eventually file for your actual benefits.
As a result, the benefit amounts you "actually" end up receiving from social security is likely to be somewhat different, and possibly materially different, than the estimated values on your statement. The amount of the difference can vary from a few dollars per month to hundreds of dollars per month.
For example, I had a very successful high earning client who was age 57 and planned to stop working at age 58 and not draw on SS until at least age 66. Her SS statement clearly over stated her estimated benefit at age 66 because social security assumed, on her statement, that she would continue to earn her high income each year until she reached age 66. When I "re-calculated" her estimated benefits, it ended up being $111,000 less in lifetime benefits than shown on her social security statement. This had a material impact on her overall retirement income planning.
I had the opposite result with a divorced client of mine. She divorced in her late 50's but then returned to work. Although her income started out low it continued to gradually increase each year. When I incorporated her estimates of her future income (not the one used by social security) I was able to show her that she could now plan to file a restricted application at her age 66 and defer her own benefits to age 70, in order to earn delayed retirement credits. Her own social security benefit would then grow to more than half of her ex-spouse's benefit. She could then switch to her own now higher benefit. This increased her expected income in retirement by over $60,000.
Again, had she assumed that the estimated benefits on her social security statement were correct, she never would have thought to file a restricted application. This is because her estimated benefit was less than one-half of her ex-spouse's benefit and was estimated to remain that way throughout her life. In this case, an incorrect estimated income on her social security statement had a profound effect on her anticipated retirement income.
Lastly, it is important for everyone to check the earnings history as shown on their SS statement versus their own earnings records. It is not uncommon for social security to have incorrect earnings information. One of my clients, who happens to be an accountant, found that social security had recorded zero income for him for five consecutive years in which he was actively employed and earning substantial income. He is currently digging up old tax returns to rectify the situation with social security.
Even if your earnings history is correct, the only way to get a more accurate estimate of your social security benefits is to use sophisticated social security software that will allow you to "re-calculate" your benefits by incorporating both past earnings and your own estimates of future earnings, as well as an assumed inflation factor.
Clearly it is critical not to rely on the estimated benefit amounts shown on your social security statement. First double check to see if the annual income figures shown on your statement are correct. Secondly, recalculate your benefits using your own estimated annual income projections or seek the assistance of a qualified social security expert to re-calculate your benefits for you. It could have a profound impact not just on what your actual social security benefit amount will be but it could also affect your decisions regarding the best time to file and the best way to co-ordinate your benefits with spousal or ex-spousal benefits.
Ash Ahluwalia, NSSA, CCSCA, MBA