The Fine Print on Social Security

Social Security is one of the biggest things on people’s minds when they approach retirement. Every 5 years we get a statement from the government with a nice large bold number on it that reaches out to us like a pat on the shoulder and says “Hey, you’re going to have some income in retirement” and that makes people feel pretty good.


The awkward thing about that is, depending on your retirement plans, that number is probably wrong…


The truth is that calculating a worker’s benefit for social security is considerably more complicated than most people realize. The process involves indexing your wages for inflation and then using your highest earning 35 years to calculate your worker’s benefit.


Where the process throws people is that there are two key assumptions Social Security must make to do this. One is the indexing factor and calculation formula which don’t get locked in until you’re 60 and 62 years old respectively. The other is what your future wages will be. Social Security defaults to assume you will make the same amount of money as you did the previous year until you claim benefits.


If either of those variables change you can end up with a different benefit than what they show on the sheet.


Some common situations that can throw those numbers off are:


  1. You wait a few years after retirement to claim your benefit
  2. Your salary changes significantly in the years before you claim benefits
  3. You retire during your 35 indexed highest earning years.


As you can see, it doesn’t take anything out of the ordinary to affect your benefit. It is worth having a professional take a look at your latest statement to make sure you get what you expect when you finally decide to cash in.