Social Security is probably the most important social program for seniors. Though it covers the disabled and survivors of deceased workers as well, it's instrumental in keeping millions of retired workers above the poverty line.
According to an analysis from the Center for Budget and Policy Priorities, monthly payouts from Social Security keep 22.1 million Americans out of poverty. Of these 22.1 million beneficiaries, almost 15.1 million are retired workers aged 65 and up. In fact, the Social Security Administration (SSA) notes that 62% of retired workers lean on their monthly stipend to account for at least half of their income. It's simply that important.
The four factors that determine your Social Security benefit
Of course, what seniors ultimately receive each from Social Security each month depends on four factors:
- Their work history.
- Their earnings history.
- Their birth year.
- Their claiming age.
When calculating a retirement benefit, the SSA will factor in a worker's 35 highest-earning years. That means you'd want to work a minimum of 35 years to maximize your Social Security payout, if not longer. And although it probably goes without saying, you'll want to earn as much as you can in the 35 years that are taken into account.
Your birth year plays a role in determining your full retirement age, or the age at which the SSA deems you eligible to receive 100% of your retirement benefit. All seniors and working Americans have a full retirement age that ranges from 65 to 67, depending on birth year.
Lastly, when you claim matters. If you enroll for benefits at any point before reaching your full retirement age, you'll be accepting a permanent reduction in what you'll be paid of up to 30%, depending on your birth year. Similarly, waiting until after your full retirement age to begin receiving a stipend can increase your payout by as much as 32% over what you'd receive at full retirement age.
The average baby boomer can expect to receive this much from Social Security over a lifetime
The decision of when to take benefits looms particularly large for baby boomers, who are traditionally defined as being born between 1946 and 1964. A 2016 survey from the Insured Retirement Institute finds that 59% of boomers expect Social Security to be a "major" form of income during their retirements, up from just 43% in 2014.
So, how much can the average-earning baby boomer expect from Social Security? To get that answer, we'll turn to a 2015 report (links opens a PDF) from the Urban Institute detailing the estimated lifetime benefits received and taxes paid for seniors aged 65 at five-year intervals.
For our example, we'll be focusing on the estimates from the year 2020, because that's when boomers born in 1955 will turning 65 -- and it also happens to be right in the middle of the baby boomer birth range.
According to the Urban Institute estimates, a single man with average earnings of $47,800 in 2015 dollars can expect to receive $304,000 in lifetime Social Security benefits. A single woman with the same average earnings ($47,800 in 2015 dollars) can expect to receive $332,000. Remember, women have a longer life expectancy than men, hence the difference in average lifetime payout. If we bridge the gap and average the two, a middle-class boomer can expect to receive approximately $318,000 in lifetime Social Security payments. Since SSA data shows that the average 65-year-old lives about 20 years, we're looking at an average payout of $1,371 a month. That may not seem like much, but it should be enough to keep millions of boomers out of poverty.
Two simple ways boomers can boost their payouts
Then again, it's not as if baby boomers don't have tools to improve their lifetime payout.
For instance, baby boomers' most important tool is choice. By waiting as long as possible to claim benefits, boomers will allow their payout to grow by approximately 8% per year. Though eligible beneficiaries can begin receiving a payout as early as age 62, they have incentive to wait. For each year a worker holds off on enrolling for benefits, the payout grows, up until age 70. All things being equal (i.e., work and earnings history, and birth year), a worker claiming at age 70 can earn 76% more a month than a worker claiming at age 62.
Naturally, claiming at or after your full retirement age takes some consideration. If you're in good health, or if you have insufficient retirement savings, then waiting longer to claim a higher monthly benefit, or perhaps working a few more years, makes a lot of sense. However, if you're not in good health, waiting to claim probably won't help you maximize your lifetime payout.
Second, baby boomers have access to a Social Security do-over if they regret claiming early. Form SSA-521, officially the "Request for Withdrawal of Application," allows retirees to undo their claim within 12 months of first receiving benefits. This is a particularly useful mulligan for seniors who've struggled to generate income but recently landed a well-paying job. The catch is that you'll have to pay back every cent you've received from the SSA, along with any payouts that have been made to a spouse or children based on your earnings history. However, if you meet these requirements, your claim can be undone, and your payout will once again grow until age 70.
Though Social Security isn't designed to be a primary income source, it has the capacity to keep a majority of well-prepared boomers out of poverty during retirement.