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The Average Social Security Retirement Benefit Could Be $5,600 Higher Annually, but There's a Catch

Sean Williams, The Motley Fool

Social Security is, for better or worse, a financial pillar that's responsible for buoying our nation's retired workforce. Each month, 63 million benefit checks go out to eligible beneficiaries, of which seven out of 10 are retired workers. Of these retirees, more than three out of five rely on the program for at least half of their income, with 34% leaning on Social Security for virtually all of their income (90%-plus).

But you might be surprised to find out that the average Social Security benefit paid to retirees isn't all that much money. According to data from the Social Security Administration from January 2019, the average benefit paid out to the program's nearly 43.9 million retired workers was $1,463.97, or $17,568 for the year. That's about 41% higher than the federal poverty income level of $12,490 in 2019.

However, this payout could be substantially higher, if one condition is met.

Two Social Security cards lying atop two fanned piles of cash bills.

Image source: Getty Images.

Understanding how your retirement benefit is calculated

When the Social Security Administration (SSA) determines your retirement benefit, it takes into account five factors. First, the agency determines whether or not you've met the required 40 lifetime work credits to earn a Social Security retirement benefit. Most workers will have little trouble doing so since earning the maximum of four credits per year can be done in 2019 with just $5,440 in earned income ($1,360 in income per credit).

The second and third factors are linked together: Your work history and earnings history. When calculating your benefit, the SSA will take into account your 35 highest-earning, inflation-adjusted years. For each year less of 35 that you've worked, a $0 will be averaged in and drag down your eventual payout.

The fourth factor taken into account is your birth year, which is what helps to determine your full retirement age (FRA). Your FRA is the age at which you become eligible to begin receiving 100% of your monthly benefit. Begin taking your payout at any point prior to your FRA and you can expect a permanent monthly reduction. Likewise, wait until after your FRA to take your monthly payout, and you can expect a boost above 100%.

The fifth factor is arguably the most important: your claiming age. Benefits for retired workers can begin at age 62, or any point thereafter. The catch is, for each year you wait to claim your benefit, your payout will grow by approximately 8%, up until age 70. All things being equal (i.e., work history, earnings history, and birth year), an individual claiming benefits at age 70 could net 76% more per month than the same individual claiming their benefit at age 62.

A half-emptied hourglass on a table that's next to a calendar.

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Want up to an extra $5,600 a year? Simply wait as long as possible

Among the factors listed, none has more power to influence your monthly and lifetime benefits than your own decision of when to take Social Security benefits. Should you choose to do what only three out of every 100 retired workers has chosen to do and wait to take your payout until age 70, you could, hypothetically speaking, increase your annual payout by over $5,600 a year, based on the assumption that the average retired worker benefit ($1,463.97 per month) is what an individual at full retirement age is receiving now.

For baby boomers born up until 1954, their full retirement age is 66. With a gain of roughly 8% for each year an individual foregoes their payout, this means that by age 70 they'll receive 132% of their full retirement benefit instead of just 100% at age 66. This 32% bonus means an extra $5,621 more per year for those retired workers who've been patient.

Generations X, Y, and Z (i.e., anyone born in or after 1960) will still get a nice bonus by waiting, but it won't be nearly as much as those folks born in 1954 or earlier. Workers born in 1960 or later have an FRA of 67, which means their "bonus" for waiting until age 70 is capped at an additional 24%, or an extra $4,216 per year in benefits.

The point is simple: If you want a much larger monthly benefit... wait!

A smiling senior man playing chess at the beach.

Image source: Getty Images.

But there's a catch

Of course, you should know that nothing with Social Security is ever this cut-and-dried. While it's true that the average retired worker could see a substantial increase in their annual take-home from the program by waiting until age 70 to take their benefit, waiting until age 70 simply isn't for everyone.

For instance, persons who are in poor health, or who have a chronic health condition that could shorten their life expectancy, often benefit from taking Social Security sooner rather than later. Waiting may net a higher monthly benefit, but claiming early will almost always generate more lifetime income from Social Security for an individual who passes away prior to reaching the average life expectancy of close to 79 years.

Likewise, a senior who is out of work and struggling to generate income may have no choice but to claim their benefit early. Thankfully, a sort of mulligan exists within Social Security that can allow an individual to undo their claim within the first 12 months of first receiving benefits. This do-over clause is particularly handy if a senior lands a well-paying job shortly after beginning benefits. But the fact remains that not everyone has the earning capacity to last until age 70.

Lower-earning spouses generally also benefit from taking Social Security early. Since it makes more sense to let a higher-earning spouse's benefit grow over time, the lower-earning spouse can often claim early and provide interim income for the household.

In other words, the average Social Security retirement benefit could easily be much higher than it is now, but waiting isn't suitable for all future beneficiaries.

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