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Do you ever wonder how much retirement income to expect from Social Security?

Many people do not understand how their Social Security retirement benefit works. Understanding this can help you calculate your benefit. Or, Social Security will do it for you (based on existing data). Just go to your MySocialSecurity account and use the Retirement Calculator. If you know how Social Security benefits are calculated, perhaps it can help you make better decisions when you approach eligibility age.

Publication No. 05-10070 explains how your benefit amount is calculated. Prior to 2020, this form contained the income index factors as well as the worksheet. It appears now, you must go to the Annual Statistical Supplement, Appendix D at www.socialsecurity.gov/policy/docs/ statcomps/supplement to calculate your indexing factors.

I'll try to make it easy:

Your benefit is computed from your income information in the year you turn 62. If you work past this, it will be recalculated when you reach your Full Retirement Age (FRA).

1. The first amount to calculate is your 'average indexed monthly earnings' or AIME.

To calculate your AIME, the SSA takes each year of earnings throughout your working lifetime, up to the Social Security taxable maximum for that year. Then, each year's earnings are adjusted for inflation, or "indexed."

The formula uses your 35 highest years of indexed earnings to determine your AIME. The calculation is done by adding the 35 highest years of indexed earnings together (years with zero earned income are added as 'zero'), dividing by 35 to find your annual average, and dividing this result by 12 to determine your lifetime monthly average.

2. Next, find your Primary Insurance Amount or PIA. You use your AIME in the following manner. NOTE: This is for someone turning 62 in 2019. The income indices and PIA change yearly, so your calculations will most likely be different. The publication's Appendix D will take you through all these steps.

To determine your PIA, your average indexed monthly earnings are applied to a formula. For 2019, the formula is:

90% of the first $926 in AIME

32% of the amount of AIME greater than $926, up to $5,583

15% of the amount of AIME greater than $5,583

These percentages stay the same each year (under current law), but the thresholds (known as "bend points") change. These are represented by $926 and $5,583 above. Add these three numbers together to get your PIA.

As you can see, the system favors lower lifetime income levels to provide more relief to workers with less lifetime income.

Here's an example of how this works: Let's say that I'm turning 62 in June 2019 and my average indexed monthly earnings are $5,000. My PIA will be:

90% of the first $926, or $833.40

32% of the remaining $4,074, or $1,303.68

15% of the amount over $5,583, or zero

Combining these three amounts gives me a PIA of $2,137.08 per month. Note that this isn't the actual amount I'd get if I claim at age 62. At 62, there would be a 28% discount (.56% per month times the number of months until FRA). It would be more like $1540.

SCORECARD

At the end of April:

Willie had a month end balance of $191,596.03. His monthly benefit check (including the COLA) would be $2146.75 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $213,988.57.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $215,463.80.

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I just read an article by a well known financial planner. He gave an example of a 66 year-old woman who had the choice of filing for Social Security and receiving approx. (he doesn't say for sure) $3,000, or waiting until age 70 to get an additional $1,050. I don't know what COLA he used, so I can't be sure what the age 66 amount is. His argument was if the woman waited, and spent down $150,000 of her savings during those 4 years, the added $1,050 benefit per month was equal to plopping down $250,000 on an annuity to get the same $1,050 per month guarantee.

This logic has me scratching my head on a couple of levels. First, let us assume the client does have the $150,000 (or the $250,000?). Second, the assumption is the only investment alternative available is the annuity. Annuities are priced to ensure the issuer makes money. Anytime some middleman skims off some of your gain, it benefits them, not you. One thing many people may not know, when you die, that annuity money remains with the issuer, not your heirs. It is gone forever! I think a better plan would be to file at 66 and spend the Social Security benefit checks and to let the savings build through the magic of compound interest. The life expectancy for a 66 year-old woman in America today is roughly 20 more years. To keep the math simple, I'll just use the base monthly numbers and not try to predict COLA or inflation:

At age 86 with a modest 5% gain on her investment, she would have $193,002 on her 86th birthday. Plus, in the meantime, if she dies or needs a big chunk of money, that $150,000+ is always there. If she spent down the $150,000 and started depositing the extra $1,050 every month after her 70th birthday, she would have $186,025 on her 86th birthday. On her 70th birthday, she'd have zero savings and the promise and hope the government will pay her an extra $1,050 per month. I say keep your money!

Another down month, but a 10.8 cents per share dividend helped soften the blow. At the end of March:

Willie had a month end balance of $195,794.38. His monthly benefit check (including the COLA) would be $2132.68 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $216,363.46.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $217,446.35.

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Do you subscribe to or read financial magazines? It's truly entertaining. At the beginning of the year, the hand-picked 'experts' of the publication; mangers and financial advisors who control massive amounts of our money make predictions for the coming year. In July, more often than not (I'm not lying, look it up) their picks have trailed the general market and in the follow-up article they wax on and on about why. Then they make mid-year predictions and the cycle starts again. It's really entertaining, but it's not funny, is it?

What to do?

I pay no attention to their recommendations. I do read the articles to find out about companies I may know nothing about. If I see something interesting, like a company with a new product or in a sector with little or no competition, or some other tidbit that catches my eye, I'll follow-up with more research. But unless you want your returns to match the lagging returns of these experts, stay clear.

Ouch! It had to happen. The experts predicted it. The markets slid during the month. But wait, they recovered somewhat too. What moves should I make? Probably none! Your strategy is long-term. Incremental highs and lows should not shake you or if you like, not even get your attention.

The fund's share price dropped by month-end to 27.91. Take some solace that it is still above the year-end close. Our investors will definitely see a drop in their investment nest eggs.

Willie had a month end balance of $201,749.58. His monthly benefit check (including the COLA) would be $2118.69 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $220,639.30. Her Social Security deposited account now has $18,889.72. A small solace for her is the benefit check purchased more shares this month than it did last month.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $221,332.15.

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Happy New Year! Don't you wish you could know how the markets and more importantly, individual stocks will perform this year? I remember the movie, The Final Countdown, where a modern aircraft carrier (USS Nimitz) traveled back in time to the day before the Pearl Harbor attack. The captain of the ship is revealed at movie's end to be a modern day multi-millionaire. Why? Because he knew what investments to make in the intervening years leading up to the time travel. If only we could go back in time …

A 2% Cost of Living Increase for Social Security benefits is applied beginning this month. This increase changes the calculations a little. The checks will be larger and the savings withdrawals needed to match it will also increase.

The Tax Cuts and Jobs Act of 2017 (TCJA) takes effect. Most workers have fewer taxes taken out of their paychecks and even the Democrats grudgingly applaud the extra money for most Americans.

The fund's share price is up yet again, to 29.07 at month end.

Willie had a month end balance of $211,828.56. His monthly benefit check (including the COLA) would be $2104.00 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $2011 check and withdrew $2413 from her existing account, so her net total is $229,341.03. Her Social Security deposited account now has $17,512.47.

Sam used his benefit check to supply $1583.24 of his monthly expenses. His untouched IRA account sat at $230,531.20.

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End of year is a time typically when investors scrutinize what their investments have done, where they see their missed opportunities of huge gains (which no one can predict reliably), and what changes they may want to make for the coming year. Not to mention getting their income gains and losses in order to file income tax returns. At this time we know of the changes coming due to the Tax Cuts and Jobs Act of 2017, but these changes do not affect our 2017 tax returns. Some changes are promised to save Americans money and reduce the complexity of filing. We'll see......

The tax reform bill was signed into law mid-month and the market reacted with a yawn and a continued decent run up.

The fund's share price is up again, to 27.66. at month end. Plus, the quarterly dividend bonus of 14.85 cents per share. Willie had a month end balance of $203,850.25. His monthly benefit check would be $2091.00 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $1971 check and withdrew 2365 from her existing account, so her net total is $218,599.84. Her Social Security deposited account now has $14,749.15.

Sam used his benefit check to supply $1552.20 of his monthly expenses. His untouched IRA account sat at $219,349.60.

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November 2017

U.S. stocks performed strongly in November. Small- and mid-cap stocks surged in the second half of the month, reversing losses early in November. They closed up +3.52% and +3.68% respectively (S&P 600 and 400 indices). Large caps followed, closing up +3.07% (S&P 500 index) and finishing with positive returns for the 13th month in a row. International stocks also had a positive month, but their returns were more modest than those of U.S. stocks. Year to date, international stocks are still outperforming U.S. Stocks. Developed-market and emerging-market stocks rose by +1.05% and +0.20% (MSCI EAFE and Emerging Markets indices) respectively. Interest rates ended November up for the month. This led bonds to close down, with the Bloomberg Barclays Aggregate index returning -0.13%.

Overall, it was yet another period of low volatility in stock markets, with the S&P 500 not moving more than +/-1% on any day in November. Markets that tend to be more volatile were, true to form, more volatile in November. Small-cap U.S. stocks had four days of +/- 1% moves, and emerging-market stocks had three.

Blah, blah, blah..... Don't get me wrong, this is great news...this time. But, if you follow the news this closely and react to it, your investments are bound to underperform, because you will always be chasing yesterday's news. If you enjoy reading about the markets, that's fine, but my strategy and advice is to generally ignore short term happenings.

The fund's share price is up again, to 27.44 at month end. Willie had a month end balance of $204,622.90. His monthly benefit check would be $2036.91 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $1971 check and withdrew 2365 from her existing account, so her net total is $217,260.17. Her Social Security deposited account now has $12,637.27.

Sam used his benefit check to supply $1552.20 of his monthly expenses. His untouched IRA account sat at $217,604.96.

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October 2017

A couple of tragic events marred this month. The horrific shooting in Las Vegas and the uncovering of Harvey Weinstein's predatory sexual behavior. To me, it's inconceivable that people can be this evil.

The market generally continues to edge upward. The fund (VDADX) share price rose from $25.73 to 26.26 at month's end.

Willie had a month end balance of $197,020.80. His monthly benefit check would be $2023.55 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $1971 check and withdrew 2365 from her existing account, so her net total is $207,173.45. Her Social Security deposited account now has $10,152.65.

Sam used his benefit check to supply $1552.20 of his monthly expenses. His untouched IRA account sat at $208,247.31.

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The topic of your income needs is really outside the context of this blog's purpose. I'm including it however, because needs determine many times what direction you must go and affects the decisions you make. Tracking expenses could and should be part of your long term investment strategy at any age, but is most critical when you are getting close to retirement and need to understand what is needed. The first thing to do is to get a handle on your expenditures. Yeah, I know, this is not the first time you've heard this, but it's true. Unless you know exactly what you are spending your money on, you cannot evaluate the money needed to support your lifestyle and spending. My advice is to track expenses for at least three months without making any changes, preferable during the time you are still working. If you do this after you quit working, you may find out you will fall short, and do not have the income to stay above water. You really at this point want to find out precisely where every dollar is spent. If during this phase, you discover some obvious savings, by all means trim that fat. But it's best to see the picture of your expenses as they are really happening.

Once you've tracked expenses for a few months you will begin to notice trends. You will be surprised to find money being wasted or you will find you are spending much more on things than you thought (think Starbucks!). You will find you are spending money on non-essential things such as entertainment or eating out. Perhaps these are important to you and that's OK, just make sure you understand how these expenses add up to account for a sizable chunk of the money you spend and can easily be trimmed or eliminated if needed. You may look at your clothing purchases and determine some trimming could occur here as well. Ideally, you will track this information for a full calendar year, making sure you are capturing seasonal bumps and valleys due to weather, travel, and other random expenses such as emergencies and repairs.

Perhaps the habit of tracking expenses will continue and you will always have a handle on where your money is going.

The output of this effort is knowing what your household will need when things change as you transition from an earner to a spender. Most people who track expenses spend less, simply because they make the decision to buy or not buy at the time and not later.

I found a good source for learning about online tools for budgeting and tracking at:

https://www.doughroller.net/tools-resources/10-online-budget-tools/

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You will often hear and see this acronym concerning the discussion of Social Security benefits. Social Security's full-benefit retirement age (FRA) was originally set at 65. The Social Security Act was signed into law by President Roosevelt on August 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement. The FRA remained constant from the beginning of Social Security until legislation that was passed in 1983 recognized Americans were living much longer than when Social Security was implemented. That legislation created an increasing scale for FRA beginning with those born in 1938. Those born in 1939 were given an FRA of 65 years and 2 months. The FRA gradually increases to where those born in 1960 and later have an FRA of 67. Go to the Social Security website to find your FRA. The increase in the FRA, one of many provisions in the 1983

amendments designed to improve the system’s financial outlook, was based on the rationale that it would reflect increases in longevity and improvements in the health status of workers. The 1983 amendments did not change the early eligibility age of 62; however, the increase in the FRA results in larger benefit reductions for workers who claim benefits between the age of 62 and their FRA.

The FRA is the age which you will earn 100% of your full retirement benefit, based on your earnings history. How this is calculated is discussed in a separate blog entitled “Calculating your Benefit”.

There is a financial bonus for delayed retirement. An individual reaching the full-benefit age in 2017 (66 years and 2 months old) receives a monthly benefit that is 8 percent higher for each year he or she delays collecting benefits until the latest claiming age of 70, at which point benefits are 132% of what they would have been at the normal retirement age (when the full benefit age reaches 67, benefits claimed at age 70 will be 24 percent higher because of that delay.) The maximum retirement benefit in 2017 for someone who waits until age 70 to collect benefits is $3,538 a month.

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SEPTEMBER 2017

The market keeps tracking upward as investor confidence soars. The Dow Jones Industrial average closed at a record 22,405 on the 29th. This indicator is a good snapshot of what the market in general is doing, but your own personal portfolio will probably not match it exactly. A better 'market-wide' indicator is the S&P 500. But as with the Dow, your investment mix will surely be different in some way.

The fund (Vanguard Dividend Appreciation – VDADX) pays a dividend to shareholders 4 times a year, March, June, September, and December. A dividend is a benefit a shareholder receives for investing in a company. Not all traded companies provide dividends, But as stated before, this fund only invests in those that do. In fact, the companies owned by this fund must pay dividends and further, they must have a record for increasing dividends. If you want to buy individual stocks for income (dividends), the holdings of this fund are a very good place to start. This month, on the 20th, VDADX paid a dividend of 11.6 cents per share owned. The closing share price at the time was 25.59, so the dividend represented roughly a .45% return, or an annual rate of approx. 1.8%. not great, but steady. It's a bonus of sorts to our retirees. They can reinvest in more shares, take the money out, or leave it in a 'cash' state, perhaps to be used for emergencies or special expenditures. To keep it simple, I will have all of them reinvest it back into more shares of VDADX. Willie had a month end balance of $194,038. His monthly benefit check would be $2010.28 if he changed his mind and decided to file for benefits at this time.

Irma deposited the $1971 check and withdrew 2365 from her existing account, so her net total is $203,378.35.

Sam used his benefit check to supply $1552.20 of his monthly expenses. His untouched IRA account sat at $204,044.29.