Why Your Social Security Projection is Probably Wrong

When doing retirement planning sessions with people, we often talk about their retirement resources in order to help them plan for the future.  We look at any pension incomes that will come their way.  We look at their savings and investment accounts, their contribution levels and the potential growth of those accounts. 

And, we also look at Social Security.  Depending on the age of the employee, we occasionally don’t use Social Security at all to be very conservative.  Sometimes, we take a 25-50% discount from their most recent Social Security statement.  Once in a while, we use the numbers provided by Social Security on their statement sent out.

This article talks about how even using the full amount on your Social Security statement may even be a lowball estimate. That’s because the Social Security’s Retirement Estimator uses today’s income for all future projections and doesn’t build in any future salary increases. This reasoning would suggest that even if we use the best estimate from the SSA, you may actually end up with more money each month than projected.  That’s a wonderful thing!  But…should you count on it?

Well, the Social Security Administration projects that in the mid 2030’s, there will be funding for only about 75-80% of the projected benefits today, absent legislative changes or higher than expected economic growth.  The next time you get a statement in the mail (they’ve moved to every 5 years instead of annually in order to reduce costs), read the fine print about the projected reduction in benefits.  If you follow this path, you might want to build conservative estimates in your retirement plans.

Which will it be? Are you going to receive more than the SSA is projecting because of some of the lowball estimates that are built into their calculator?  Will you receive less because of budget shortfalls and/or legislative change?

The answer, honestly, is that I have absolutely no idea!  (I hear you saying “Gee…thanks….this blog post was REALLY useful!”)  What do we do when we face uncertainty and are unsure of the future?  We build contingency plans!  (I feel like I am king of the Plan B, C, D, E & F at times.)

Since we don’t know what to expect, let’s build estimates. You can do one that factors in nothing from Social Security. After all, there could be means testing at some future point that zeroes out your income from SSA.  Build ones that factor in 1/4 or 1/3 or 1/2 of the projections.  Build one that factors in what their estimator projects. And build one that pays you 10-20% more than projected to account for pay raises and other beneficial developments.

Retirement planning isn’t about getting the estimates right out to the 4th decimal point.  It’s about seeing many potential paths in the future and knowing how to deal with them. If some of the less favorable scenarios show that you don’t have enough resources to retire at 65, you can work longer, you can save more, and/or you can cut costs.  You have lots of options.

In some ways, whether the SSA projection is low, high, or just right (I feel like Goldilocks), it just doesn’t matter.  What matters are the behaviors that you have in place now and will have in the future.  In order to build a successful retirement, here are a few key things you can do to minimize the impact of any changes to Social Security.

  • Save as much as you possibly can. And then save some more…
  • Cut expenses.  Learn to live on less in order to save more.
  • Eliminate your debt.  All of it.

Everyone I have seen who has taken these 3 simple steps has moved forward financially.  These are both offensive (building toward the future) and defensive (protecting against harmful events like job loss or illness/injury).  If you keep it simple and focus on these behaviors, you will make the big debate about the future of Social Security a moot point in your financial life.

 

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