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Social Security is a vital program designed to provide a financial foundation for our country's seniors. Of the nearly 61 million people receiving monthly benefits from the program, two-thirds are retired workers. More than 3 in 5 of these retired workers rely on Social Security to provide at least half of their monthly income.

Despite being such an important program for seniors, knowledge of Social Security is often lacking. When MassMutual Financial issued a 10-question quiz on Social Security last year, only 28% who took the quiz received a passing grade of seven correct answers or higher. What's more, just one of the 1,513 people to take the quiz got all 10 questions correct. That's worrisome considering that a lack of understanding could wind up costing retirees tens of thousands of dollars over a lifetime.

Social Security's biggest dilemma: File early or wait

Perhaps the biggest question that remains something of a mystery to most retirees is when to file for Social Security benefits. Most Americans understand the general concept that waiting longer translates into a higher monthly benefit, but the scope of the increase, the ages at which benefits increase, and the actual increases they'll personally receive remain mysteries.

The first thing soon-to-be retirees need to understand is that everything revolves around full retirement age, or FRA. Your FRA is a dynamic figure based on your birth year that determines when you're eligible to receive 100% of your Social Security benefits. Remember, those benefits are based on your average annual income over your 35 highest-earning years. The FRA for current and future retirees is 66 years, 67 years, or somewhere in-between. You can find your specific FRA by referencing this handy retirement planner from the Social Security Administration.

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The ability to file for Social Security benefits begins once you turn 62 years old. Thus, for each year you hold off on claiming benefits up until age 70 (the last point at which your monthly benefit grows), your benefit grows by approximately 8%. This means filing for benefits before reaching your FRA could result in a monthly benefit that's up to 25% to 30% below your FRA benefit. Likewise, waiting to claim benefits until age 70 could result in a monthly payment that's larger than your FRA benefit by 24% to 32%, depending on your birth year.

Who benefits by waiting and collecting a higher monthly payment? Though everyone's situation is unique, seniors with little or nothing saved for retirement and people in excellent health are good candidates to hold off on filing for benefits. Not having a lot saved might make it tempting to file for benefits early, but without much in savings you'll probably be heavily reliant on Social Security income during your golden years, meaning you should allow that benefit to grow as large as possible. Higher-income spouses also typically benefit from waiting to sign up.

On the other hand, some people would benefit from taking Social Security early. Seniors carrying around a lot of debt, seniors who are in poor health, wealthier individuals who aren't in any way reliant on Social Security income, and seniors with limited earning capacity are all strong candidates to file for benefits before reaching their FRA.

Which pathway is right for you? Perhaps the following table will answer that question.

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The most important Social Security table you'll ever see

Sometimes the best thing you can do is look at your options from a visual perspective. With this in mind, let's examine what the average Social Security beneficiary would bring home over their lifetime if they filed for benefits at age 62, age 66 (assuming their FRA is 66 years), and age 70.

For our example, we'll use the average retired worker benefit of $1,350.64 as our FRA benefit, since this dollar amount happened to be the average payout to retired workers per the SSA as of August 2016. To keep things simple, let's also assume static payouts, even though we know that the SSA factors inflationary increases into your benefit over time. We're not going to factor in federal tax responsibility, either, even though earning too much could cause a percentage of seniors' Social Security income to be taxed at the federal or state level.

Here are the scenarios we'll examine:

  • Collecting benefits as soon as possible at age 62 and taking a lifelong 25% haircut from $1,350.64 per month to receive $1,012.98 per month. This scenario allows for an extra four to eight years of payment collection over the other two strategies.
  • Collecting benefits at full retirement age (66 years old) and receiving $1,350.64 per month.
  • Collecting benefits at age 70 and receiving a 32% increase over the FRA benefit, or $1,782.84 per month.

Let's see how these scenarios shake out on a monetary basis.

AgeCumulative Benefit Received, File at Age 62Cumulative Benefit Received, File at Age 66Cumulative Benefit Received, File at Age 70
62 $12,155.76 $0 $0
64 $36,467.28 $0 $0
66 $60,778.80 $16,207.68 $0
68 $85,090.32 $48,623.04 $0
70 $109,401.84 $81,038.40 $21,394.08
72 $133,713.36 $113,453.76 $64,182.24
74 $158,024.88 $145,869.42 $106,970.40
76 $182,336.40 $178,284.78 $149,758.56
78 $206,647.92 $210,700.14 $192,546.72
80 $230,959.44 $243,115.50 $235,334.88
82 $255,270.96 $275,530.86 $278,123.04
84 $279,582.48 $307,946.22 $320,911.20
86 $303,894.00 $340,361.58 $363,699.36
88 $328,205.52 $372,776.94 $406,487.52
90 $352,517.04 $405,192.30 $449,275.68

Table by author. Calculations by author based on data from Social Security Aug. 2016 snapshot. Cumulative benefit based on year-end total. 

In what I can only describe as the most important Social Security table you'll ever see, you'll note the vast disparities in early retirement income versus income later in life. If you're not expecting to live a long life, then taking your benefits early makes sense. However, if you believe you could reach your mid-80s, waiting until age 70 to file for benefits is your best bet. In fact, even though the early retirees get an eight-year head start in the above example, by the end of age 90 the late-filer has collected nearly $100,000 more in lifetime benefits.

Another interesting thing you'll notice is that the inflection point at which it becomes worthwhile to wait tends to coincide very closely with the average life expectancy of Americans (which is nearly 79 years according to the Centers for Disease Control and Prevention). Before the end of the 78th year is where filing at your full retirement age earns a retiree more money, whereas the age 70 filer sees the inflection point tip slightly after the 78th year compared to the early filer.

Now that you have a visualization to accompany some of the best scenarios for filing early or waiting, the ball is in your court to make the most financially sound claiming decision for you.