Wife and I are in our 40’s right now, and we’re trying to gauge what our financial status will be when we retire. Rather than using the “retirement calculators” that are available on various investment house websites, I’ve created my own Excel spreadsheet so that I can adjust various parameters (annual savings, rate of return, inflation, etc.) and see what that does to results.
I’m not sure how to factor in social security disbursements. Every year I get a statement from the SS administration that says “if you retire at 62/65/70, you will receive $X per month.” Assuming the whole system doesn’t implode sometime in the next 20 years or so (yeah, big assumption), when they say I will receive $X per month, is that in current dollars, or is that the absolute number of dollars that will go into my bank account each month starting in ~2035? If it’s current dollars, and if I assume 3% inflation per year between now and then, the amount of the disbursements increases by a factor of 1.9, greatly affecting the amount of money we would need to withdraw from our own savings.
This appears to confirm my suspicion, i.e. disbursement forecasts are in current dollars, and the actual numbers printed on the checks 20+ years from now will be approximately double the number shown in my recently-received forecasts.
so is that the real answer? i’ve been looking at my statements too, and if the numbers they say are current dollars, that’s even better than i hoped. of course, that’s assuming they are still paying out then.
I assume SS adjusts for inflaton over the years. If you put in enough to earn the maximum benefit you will collect the maximum benefit (this is how Canada Pension Plan works). That will adjust for inflation.
When trying to calculate retirement don’t bother trying to figure in inflation. (a) it’s unpredictable, and (b) you will confuse yourself. $200,000 a year looks good unless you realize that a cup of coffee costs $100.
Barring another market meltdown, your house will seel for about what it sells for now in terms of purchasing power, unless you see some deep meaningful reason why it will not. You hope property and income taxes will be about the same. When calculating savings plan growth, use a percentage growth minus annual inflation. (I.e. will grow 6% but inflation will be 2% so plan on 4% growth.) Unless you know something, your salary will stay about the same.
As a result, using this logic, your retirement SS income will be what the statement projects it to be.
SS is not going to factor-in inflation in your statement. If they did, then any time the inflation did not meet the expectations, then they would have promised more than they would deliver. By using 0% inflation, any increase due to inflation looks like a nice extra.
(There’s the joke about the guy who decided to have himself frozen for a century to let his investments make him rich. A hundred years later he’s defrosted, the first thing he does is phone his brooker and see how rich he is. His broker says “your savings are worth about 3 billion dollars.” He says “Wow! That’s great!” then the operator cuts in with “Please deposit 2 million dollars for the next 3 minutes.”
This is exactly why I’m trying to account for inflation. If I currently spend X dollars per year on travel, dining out and car payments, then in 2035 I would only expect to maintain the same lifestyle if I spend 1.9X dollars per year on those things. Accounting for inflation when I forecast my income needs AND my income sources 20+ years from now helps me accurately gauge how big my nest egg will need to be, and whether my investments are on track to exceed, hit, or fall short of that goal.
I guess this is the opposite approach, i.e. expressing everything in 2013 dollars instead of 2035 dollars. Either method accounts for inflation.
this is why I recommend this approach - you have no idea what inflation will be, and a 1% difference will make a huge difference in numbers in 20 or 30 years. (“Should I be looking for 1.9x or 2.7x? or 5x??”)
If you’re only in your 40’s, you definitely want to use an SS calculator that lets you enter your estimated future earnings. SS benefits are based on your 35 highest earning years so your current benefits are calculated with quite a few $0 years. By the time you retire, you’ll have 20 years of additional earnings, and they’ll undoubtedly be some of your best 35.
SSA provides several calculators here: Benefit Calculators - Estimate Your Benefit and you can use the one that provides the level of detail and accuracy you want. The Quick Calculator is very quick, but makes a lot of estimates and assumptions for you.
SS uses a 90-32-15 system. After they get your adjusted monthly income (say $3000) you get 90% of the first $800 or so, 32% of the next 3-4k or so and 15% of the next 5-6k or so until you hit the cap which is around 110k.
These are really rough numbers mind you. But after your annual income goes above about 50k in todays dollars (or $4000 a month), the return on SS is pretty low since you are only getting 15 cents back for every dollar in income you have earned.
Of course I believe it is done monthly, not annually and it is averaged. So if you earn 100k one year and 0 the next, you get 50k for both years which is about $4200 a month for 24 months.
But the rate of return drops after $4000 or so in monthly income. I think that that level, you can expect about $1800/month in SS. If you average out $10000 in monthly income you only make about $2500/month in SS.
Yeah but inflation is different in retirement. Medical inflation constantly outpaces regular inflation, and medical expenses will be a bigger % of income. But other things like food, clothing, transportation, etc. go down compared to inflation.
I really don’t know how the retirement inflation calculation would work. If medical costs are 4x higher than they are now when you retire, but food and cars are 50% cheaper for the same quality available today, then that is a much more complex calculation.