Social Security

You Should Get $35,000 More from Social Security Than You Think

By Rajat Kongovi

My friend Frank is prepared. He has been saving for retirement since he had his first job. He knows all about IRAs and 401(k), and can deliver quite an impressive speech on the state of his brokerage accounts. So, when I asked Frank if he knew how much he would have when he retired, I was surprised that he overlooked one big source of income - Social Security. He knew he was paying his taxes, but he didn’t have a clue what his benefits would be when he retired.

Social Security Makes Up 60% of Your Retirement

At least, it does for the average American couple.1 The Social Security Administration projects they will receive $1,6272 a month for 223 years. That’s a hefty $430,000 in Social Security benefits over a lifetime.

You may be asking yourself, how did I not know this? Most of us don’t and it’s partly because budget cuts have forced the Social Security Administration to stop sending annual statements. You can expect to get a statement in the mail every 5 years but you don’t have to wait. Register online on the Social Security Administration website to see your statement at any time.

When I told Frank about this, he went from being puzzled to delighted as he recalculated his retirement income. But, we weren’t done. I told Frank his new calculation was off ... by about $35,000 … but in the right direction.

Social Security Benefit Projections Are Off - You’ll Have More Than You Think

For the average American, the Social Security benefit is underestimated by about $35,000. The challenge is in the calculation, which relies on two inaccurate assumptions:

  1. The basic level of benefits increases with inflation
  2. Your earnings remain the same … forever

Assumption #1 The basic level of benefits increases with inflation

When the Social Security Administration creates your statement, they start with a calculation of what your benefit would be today. Next, using the inflation rate, they forecast what the benefit will be in the future when you retire. However, when it’s time to claim your Social Security benefit, the actual amount will be based on the average wage at the time of retirement, not on inflation.4

Where $35,000 goes missing is that average wages have been increasing faster than inflation. Every year, the Social Security Administration looks at all our tax returns to determine the national average wage. Since 1951, the average wage has outpaced inflation by almost 1% per year. That may not sound like much, but over time it adds up. Because of inflation, prices are about 9 times higher today than in 1951. But, average wages are 16 times larger today than they were in 1951.

Assumption #2 Your salary remains the same … forever!

When it’s time to claim your Social Security benefit, the actual amount will depend on your earnings over your lifetime. The Social Security Administration’s benefit forecast assumes that your wages will remain the same until you retire. We know that’s not true. Most Americans expect their income to increase as they gain work experience or get promoted.

You Can Expect to Get More From Social Security

In short, your retirement benefit is being underestimated and you can expect to see more dollars in your Social Security account. In fact, the Social Security Administration itself commissioned a study that found this same issue with its calculations. The average American gets a benefit estimate that’s short by about $1855 per month. That’s more than $35,000 over a lifetime.6

For a more accurate estimate of your Social Security benefit, check out our free Social Security calculator.

  1. The Congressional Research Service estimates the average household will have $300,000 in assets when they retire, between their savings and the value of their home
  2. Fast Facts & Figures About Social Security, 2011
  3. Actuarial Life Table from the Social Security Administration
  4. This is the case for NEW retirees only. Once the initial benefit has been calculated, subsequent increases ARE pegged to inflation
  5. Estimated Retirement Benefits in the Social Security Statement
  6. The average life expectancy at 67 for the average person is 16.13 years per the Social Security Administration