Retirement Planning

Will you get out of Social Security what you're putting in?

Understanding the Social Security process can be challenging. Because it is different from other retirement plans there are many facts to consider and be aware of.  

Understanding How Social Security Works

For many Americans, Social Security provides a base of income protection in retirement. But if you're under the assumption that what you paid into the system is exactly what you'll get out of it, here's what you need to know.

Social Security works differently than your 401(k) or another qualified retirement plans. For example, with a qualified retirement plan, you can roughly estimate how much of a distribution you may receive from your retirement savings based on how much you voluntarily contribute to your accounts every year. Social Security benefits, however, aren't calculated so simply.

Unlike contributions to a private retirement plan, you're not necessarily going to have a return based upon market performance. Instead, the Social Security Administration (SSA) uses a benefit formula1 to calculate how much you'll receive come retirement.

The Social Security Formula

If you retire at your full retirement age, your retirement benefit will be 100 percent of your primary insurance amount (PIA). Your PIA is calculated by applying a benefit formula to your average indexed monthly earning (AIME). In other words, if you had high earnings over your lifetime, your benefit will be larger than the benefit of someone who had lower earnings.

However, because the Social Security benefit formula is meant to help low earning individuals supplement their income, the system's formula is heavily weighted to favor individuals with lower earnings - actually enabling them to receive a greater percentage of what they put in versus someone with higher earnings. For example, a higher wage earner may receive 50 percent of their AIME giving them a larger payout, while someone who earned substantially less could very well receive 65 percent of their AIME according to the formula. So while the dollar amounts may differ, someone earning less may get a larger percentage of their AIME.

Retirement planning is all about ensuring that you have enough money to carry you through your golden years, and Social Security plays a big part in that process. And though you can't change Social Security's benefit formula, you can make some decisions during your lifetime that will affect the amount of your benefit.

1. https://www.ssa.gov/oact/cola/Benefits.html

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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Retirement Planning And Social Security

Retirement planning is all about ensuring that you'll have enough money to last you through your golden years. When it comes to estimating your Social Security benefits, you can't count on receiving a dollar back for every dollar that you put in. This article looks at the SSA's formula to help you better understand how your benefits may be calculated. For more information, visit the Protective Life Learning Center.

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