In terms of importance, Social Security simply is unparalleled. Each month, over 62 million eligible beneficiaries receive a benefit check from the Social Security Administration (SSA), and nearly 43 million of them are retired workers. According to an analysis from the Center on Budget and Policy Priorities, this guaranteed monthly payout has been responsible for keeping over 22 million people above the federal poverty line, including just over 15 million seniors.
Furthermore, data from the Social Security Administration demonstrates just how reliant senior citizens are on the program to make ends meet. Out of close to 43 million retired workers receiving benefits, 62% lean on their monthly checks for at least half of their income, while 34% rely on Social Security for virtually all of it (90% to 100%).
Variables specific to your payout are what really matter
Yet here’s the interesting thing about Social Security: The average retirement benefit isn’t all that impressive. The April 2018 snapshot from the Social Security Administration shows that the average retired worker is taking home $1,411.07 per month, or approximately $16,933 a year. Yes, this is higher than the federal poverty level in 2018, but not by all that much.
This average Social Security retirement benefit often is the benchmark by which seniors compare their own payout. But there’s an important thing Americans need to remember about this average retirement benefit — namely, that it’s just an average.
There are a number of variables that can affect your Social Security payout or take-home income, and it’s these variables, not how well or poorly your Social Security benefit matches up next to the average retired worker benefit, that matter.
The meat and potatoes of your Social Security benefit
For example, your work and earnings history will be pivotal in determining how much you’ll be paid by Social Security when you retire. The SSA will take your 35 highest-earning, inflation-adjusted years into consideration when calculating your retirement benefit at full retirement age. This means that you’ll have to work at least 35 years to even attempt to maximize your Social Security check, so you’ll want to earn as much as possible in the years you work. This is why working later in life can be so rewarding, because you can use your work experience and skills to command higher wages, ultimately replacing lower-income years in your teens or twenties.
Your claiming age is pretty important, too. Retired workers have the option of claiming Social Security benefits at age 62 or any point thereafter. However, the SSA dangles a pretty big carrot to entice eligible retired workers to hold off on enrolling. Beginning at age 62 and ending at age 70, your benefit will grow by approximately 8% for each year you remain on the sidelines. Thus, all things being equal, you could net up to 76% more on a monthly basis by claiming benefits at age 70 as opposed to age 62.
Understandably, claiming later in life doesn’t make sense for everyone. But if your goal is to maximize your lifetime benefits and that happens to coincide with maxing out your monthly benefits, too, then waiting to claim benefits could make sense.
Don’t forget about these variables, either
Of course, there’s a bit more to it than simply earning a lot, working for at least 35 years, and claiming benefits at a specific age of your choosing.
As an example, your adjusted gross income could impact what you’ll get to keep of your Social Security benefit. In 1983, the federal government signed into law a series of amendments, one of which established the federal taxation of Social Security benefits. Should the total of one-half of your Social Security income plus your earned income exceed $25,000 for individuals or $32,000 for couples filing jointly, half of your Social Security income becomes taxable at the federal level. A second-tier for individual taxpayers earnings more than $34,000 and couples above $44,000 was added in 1993 that allows the federal government to tax up to 85% of Social Security benefits at the ordinary income-tax rate.
Similarly, 13 states tax Social Security benefits in some capacity. This means you could live in 37 states and earn as much as you want without the fear of paying state tax on your Social Security benefits. But in 13 states, your benefit may not stretch as far.
Location also can be an important variable that extends or narrows the life of your Social Security benefit — especially if you’re heavily reliant on the program. States with a considerably lower cost of living could allow a retired worker who’s earning much less than the national average retirement benefit to live comfortably. Meanwhile, a retiree in California or New York, which are known for their higher cost-of-living standards, could struggle to get by, even with a considerably higher retirement benefit.
Ultimately, averages don’t matter. The only thing that matters are the variables important to you and your Social Security benefit.
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