Among our nation's social programs, arguably none stands as more important to seniors than Social Security. The guaranteed monthly income that the program provides to just over 42 million retired seniors each month is critical in helping them make ends meet during their golden years. An analysis conducted by the Center on Budget and Policy Priorities found that senior poverty rates are just 8.8% with Social Security income, compared with an estimate of 40.5% if those same monthly payments weren't there.
Furthermore, statistics from the Social Security Administration (SSA) show that 48% of married elderly beneficiaries, along with 71% of unmarried elderly beneficiaries (61% combined), are reliant on their monthly paycheck from the SSA for at least half of their income. Leaning so heavily on Social Security isn't advised, but given Americans' poor saving habits and how few are consistently investing in the greatest long-term wealth creator -- the stock market -- this figure isn't surprising.
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Two simple ways to double your monthly Social Security benefit
In effect, it means today's working Americans and pre-retirees need to do everything they can to maximize what they'll be paid by the SSA once they retire. However, according to the July 2017 snapshot from the SSA, the average payout to retired workers a month was just $1,369.97. On an annual basis, we're only talking about $16,439.64 a year, which is above the federal poverty level but not by a lot, all things considered.
Yet, there are two simple choices that working Americans can make today that could have a remarkably large impact on their Social Security payout once they retire. In fact, it may even double what they'll receive each month.
1. Claim at age 70
The first choice is to avoid the herd mentality and to wait as long as possible to enroll for benefits.
Eligible workers who've accumulated the prerequisite 40 lifetime work credits can enroll for benefits with the SSA beginning at age 62 or at any point thereafter. However, there's a big dangling carrot for those who wait to claim. For each year that seniors wait to sign up, their eventual monthly payout grows by 8%. This means, birth year, income, and work history being equal, a retired worker who takes benefits at age 70 could earn up to 76% more per month than the same worker enrolling at age 62. That's a huge "raise" that you can give yourself by just being patient.
However, few retired workers are patient. Aggregated data from the Center for Retirement Research at Boston College shows that roughly 45% of workers enroll at age 62, with at least 60% signing up before their full retirement age (the age at which the SSA deems a person eligible for 100% of their benefit). This means, at minimum, 60% of retired workers are taking a permanent reduction from their full retirement age payout. On the flip side, just 3% of retired workers are maximizing their payout and waiting until age 70 to file for benefits.
For some folks, signing up early and not waiting for age 70 does make sense. If you're in poor health, are struggling to find work and therefore generate income, or are a lower-earning spouse, then enrolling at an earlier age can be a smart move. But if you're in good health, have an insufficient nest egg, or are the higher-earning spouse, waiting until age 70 to enroll could be a great choice.
2. Work a few extra years in your 60s
The second choice you can make that could have a markedly positive impact on your monthly Social Security benefit is to work a few extra years.
Aside from your claiming decision discussed in the previous point, the other two factors you control that affect your payout are your work and earnings history. The SSA will take into account your 35 highest-earning years in calculating your monthly payout, meaning you'll want to work at least 35 years and earn as much as you can annually, in order to pump up your payout. For each year less of 35 worked, a $0 is averaged in by the SSA.
Working into your 60s could come with two key advantages. First, working more than 35 years could allow you the opportunity to replace a year of lower earnings when you were younger with a year of higher earnings. Just as important, when you're in your 50s and 60s, you've probably gathered key work skills and experience that can net you a higher annual wage or hourly pay rate. Working more in your 50s and 60s could really pump up your earnings history and eliminate lower pay years from when you were younger and lacked the skills and experience to net a good wage.
As a quick example, I utilized the Social Security Quick Calculator to estimate monthly benefits (in today's dollars) for a person born in 1970 with a full retirement age of 67. The average American earns about $30,000 annually, which leads to an estimated payout of $1,569 a month if claiming at age 70. For each $1,000 increase in average annual earnings, the SSA's Quick Calculator estimates a $31 or $32 bump up in average monthly payout for our fictitious retiree. Increasing your average annual payout from say $30,000 to $37,000, along with waiting until age 70 to claim, could double what you would have received by following the majority and claiming at age 62.
Once again, as a reminder, Social Security isn't designed to be a primary income source. But if it will be for you, be smart with how you approach your claim for benefits and try to work as long as possible to boost your average annual earnings that the SSA will use in calculating your payout.
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