A Lifetime of Earnings

Ever wondered how much you have earned in your lifetime? It’s really easy to find out, and this bit of information can help you in a big way.

The social security website (ssa.gov) provides a lifetime earnings record for every US citizen. In fact, ssa.gov has tons of useful information available. Everything is laid out in an attractive, user-friendly format. It certainly exceeds my expectations for a government website!

I get it: social security is boring, and that’s probably a generous assessment. It’s not something you wake up on a Saturday morning thinking about. And the time when you will actually benefit from it seems so far away, so why bother?

Well…social security holds significance for many of us as we plan our futures. And the information on ssa.gov can help you plan that future more effectively, regardless of your age or location on the path to retirement.

Even if you think social security will be changed (or non-existent) by the time you need it, the data it tracks can help you answer important questions right now. We’ll get into that below.

But first, here’s a brief overview of how social security works.

How does social security work?

In terms of what you need to know, social security is a simple system. 

Throughout your working years, you will accrue credits. A minimum number of credits are needed to qualify for social security. 

Once you’ve earned enough credits to qualify, your benefit amount (AKA how much you will be paid each month in retirement) is determined by your earnings during your working years.  

Credits

In order to qualify for a social security benefit, you must accrue (at most) 40 credits throughout your working years. For 2018, a credit is earned for every $1,320 of earned income (this amount is adjusted over time, based on average wages). 

There’s an important caveat to remember: credits are capped at 4 per year. So if you earn $5,280 ($1,320 * 4) this year, you get 4 credits. Likewise, if you earn $100k this year, you still get just 4 credits. For an adult living above the poverty line, it’s pretty safe to assume they will earn the $5,280 required to get 4 credits in a year. 

Thus it will typically take 10 years of work to qualify for social security benefits (10 working years * 4 credits/year = 40 credits).

Let’s say you’ve been working for at least ten years. You’ve earned your 40 credits and you officially qualify. Sweet! How much are you actually entitled to?

Benefit amount

The behind-the-scenes calculation of your benefit amount is rather complex. What you need to know is that it’s based on the average of your highest 35 years of income from working. 

If you are 65 and you’ve worked 35 years (AKA since age 30), your benefit is based on your average annual income over those 35 years. Or if you’re 65 and you’ve worked 45 years (AKA since age 20), your benefit is based on your highest 35 years of income in that 45 year span. 

Have you worked less than 35 years? You will receive a zero for the years that make up the gap. Let’s take myself as an example. 

I’ve earned an income every year since I was 15. So, through age 35, I’ve accrued 20 years of income history.  If I were to never work again, my benefit would be calculated based on the average of those 20 years, plus 15 years of zeros (to bring me up to 35 years). 

Those zeros would bring down my average significantly. And this is before factoring in how low my income was prior to graduating college. 

I’m already entitled to a social security benefit no matter what (thanks to those 40 credits). But if I were to never work again, my benefit amount would be really, really low. 

Did all of this get you wondering about your earnings history and/or benefit amount? Are you just so jazzed about how social security works? Then we need to be friends in real life. 

But even if not, here’s how the info on ssa.gov can help you.

Lifetime Earnings History

As I mentioned at the top, ssa.gov provides access to your personalized lifetime earnings record. To view your earnings record, you must register for an account on the website. 

Once logged in, click the Earnings Record link under Overview.

Understanding your earnings record

Your earnings record displays your taxed Social Security wages for each year you’ve worked, all in a simple table. The data is broken down by year, and displays your taxed Social Security earnings on the left and your taxed Medicare earnings on the right.

Your earnings record is updated every year to reflect earnings from the previous year.

Keeping tabs on your lifetime earnings history is helpful for many reasons. Not only does it allow you to see how much you’ve earned in your lifetime, it also allows you to:

1. Calculate your lifetime savings rate
2. See how your salary has progressed over time
3. Estimate your social security benefits much more accurately

Lifetime savings rate

If you track your net worth (which you should be doing), it’s powerful to know how it compares to what you’ve earned in your lifetime. Numbers do not lie, and these numbers in particular offer a pretty comprehensive view into your overall financial health. 

If you’ve worked for 10 years, earning $50,000/year, you will have earned $500,000. If your net worth is negative, or comparatively small, then it should serve as a reminder to start fixing it. You’ve earned $500,000, but what do you have to show for it?

There are legitimate reasons why you might have a low net worth, so don’t beat yourself up too much. You might have amassed consumer debt that you’ve been working diligently to pay off. You may have student loans. Maybe you provide financial support for family members/loved ones. 

The key takeaway here is that you can’t improve what you don’t measure, and you shouldn’t plan based on unknowns. You can’t change your past, but you can change your future. If you don’t measure your net worth or your lifetime earnings, how can you really know how you’re doing financially? How can you plan for retirement or any other major life event?

How to calculate lifetime savings rate

Take your net worth and divide it by your lifetime earnings. If your net worth is $50,000 and your lifetime earnings is $500,000, your lifetime savings rate is 10%. 

Your savings rate is very nuanced, and there could be a lot of history that justifies where it’s at. But there’s no denying that it offers an important barometer of overall financial health.

Salary progress and benefits estimation

Your earnings history makes it really easy to see how your earnings have changed over time. It’s interesting to see what you were making right out of college and observe how that amount has incremented over the years. 

This also helps project future earnings growth, which is a key component when estimating your social security benefit amount. If you have a sizable work history, you can reasonably project future growth based on the past. 

There’s a calculator on ssa.gov that allows you to enter your earnings history, as well as adjust some base assumptions. The calculator produces an estimate of your social security benefit amount based on what’s entered. Plan to retire super early? You can see how that would impact your social security payout down the line.

The calculator ties together everything discussed in this article. I plugged my numbers in and was able to see what my benefit payout will be assuming I never work again. Of course, I’m not planning to never work again – it’s just interesting to run through various scenarios.

Wrap Up

No one knows what social security will look like 30 years from now. It’s been widely reported that, by 2034, the system won’t be completely solvent. Only $0.77 per dollar will be paid out if nothing is done. There will likely be strong political will to inject fixes, but that remains to be seen and, at this point, is purely speculative.

Due to the overall uncertainty of social security’s future, it’s unwise to assume it will be a major component of your retirement. But in spite of that uncertainty, there are many valuable takeaways in understanding how it works and getting a better snapshot of your personal history.

Take some time to play around on ssa.gov and see how you are doing so far. If it helps you make adjustments, then you’ve already won.