Every month, nearly 65 million people receives a Social Security benefit check. While this is a program that's evolved to protect the long-term disabled and the survivors of deceased workers, it's first-and-foremost designed to provide a financial floor for the elderly. Over 71% of Social Security beneficiaries are retired workers.
According to data from the Social Security Administration, 62% of these retirees will lean on Social Security to account for at least half of their income, with 34% essentially reliant on the program for all of their income (90%-100%). This demonstrates just how important it is for workers to maximize what they'll receive from the program.
The big question is, will your Social Security payout be higher than the average retirement benefit? The answer to that question is going to depend on a number of factors.
These four factors determine your Social Security retirement benefit
Although there are more than a half-dozen factors that can affect what you'll take home, there are four things that stand head-and-shoulders above all else.
The first two factors are linked at the hip: your work history and earnings history. When the Social Security Administration (SSA) calculates your monthly benefit at full retirement age, it does so by taking your 35 highest-earning, inflation-adjusted years into account. For each year less than 35 worked, the SSA averages a $0 into your calculation.
The third element used to calculate your retirement benefit is your birth year. Your birth year determines your full retirement age, or the age at which you're eligible to collect 100% of your monthly payout. For baby boomers, full retirement age ranges between age 66 and 67. For everyone born in 1960 or later, it's age 67.
The fourth and final determining factor is your claiming age. Put simply, if you begin taking your retirement benefit prior to hitting your full retirement age, your monthly payout will be permanently reduced by up to 30%. Comparatively, waiting until after your full retirement age can actually beef up your payout. For every year an eligible worker holds off on taking their payout, beginning at age 62, their benefit grows by up to 8%, through age 69. All things being equal, such as work/earnings history and birth year, a retired worker taking their payout at age 70 can earn up to 76% more per month than a worker claiming their benefit as early as possible (age 62).
Is your Social Security benefit higher than the national average?
Now that you have a better understanding of the process behind calculating your Social Security retirement benefit, let's get to the meat and potatoes of whether your current payout (if you're one of 46.2 million retired workers) or future payout will be higher than the national average.
Every month, the SSA puts out a snapshot of the program, allowing us to see how many people are receiving benefits and what the average payout happens to be. For the 46.21 million retired workers in October 2020, the average monthly benefit was $1,521.59. This works out to about $18,259 a year, or $6,000 above the federal poverty line.
What's particularly interesting about current retirees is that a majority of them have chosen to take their benefits prior to reaching full retirement age. SSA data shows that 67.3% of retired workers were receiving a permanently reduced payout, as of December 2019. This long history of early claims certainly weighs down the program's average monthly payout.
As for people still in the workforce who are years or decades away from retirement, you can create a "my Social Security" account to get an estimate of your personal retirement benefits. Understandably, this estimate becomes more accurate the closer you get to the eligible claiming age. Nevertheless, it'll give you a rough idea of how much income you can expect to receive from the program during retirement.
Three ways you can increase your retirement benefit
If you're not satisfied with your estimated payout, know there are a number of ways to potentially increase what you'll receive from Social Security.
The easiest solution of all is simply to be patient. Whereas two-thirds of retirees are taking their benefits early, a third are receiving their full payout or perhaps even more by waiting until at least their full retirement age to file for benefits. Not everyone will have the opportunity to hold off on claiming their payout, but the more you save and invest for your future, the better the chance is that you won't be overly reliant on Social Security income during retirement.
Aside from waiting longer to take benefits, future retirees can also choose to work longer to boost their payout. Ideally, you'll have collected decades' worth of work experience and skill by the time you reach your 60s. This experience and skill can translate into a higher wage or annual salary, which can replace one of your lower-earning, inflation-adjusted years from earlier in life.
Workers can also be mindful of where they choose to call home. While not always the case, businesses in states with a higher cost-of-living usually pay out higher wages. A worker can collect a higher nominal wage for decades in a higher-cost state, then retire in a state with a substantially lower cost-of-living. The result should be a higher monthly benefit that allows their Social Security dollars to go farther.