Whether they realize it or not, most retired workers are going to wind up leaning quite heavily on Social Security income during retirement. Data from the Social Security Administration (SSA) shows that 61% of seniors rely on their benefits to account for at least half of their monthly income during their golden years.

Yet Social Security isn't in great shape, at least based on the latest report from the Social Security Board of Trustees. The 2016 report suggested that Social Security will exhaust its more than $2.8 trillion in spare cash by 2034, leading to as much as a 21% across-the-board cut in benefits to retired workers. It's a scary prediction for the estimated 25 million retired workers who are currently counting on Social Security for at least half of their monthly income. 

A person holding a Social Security card.

Image source: Getty Images.

You control three key factors that determine your Social Security payout

However, what most working Americans may not understand is that they have more control over what they'll eventually be paid by Social Security than they realize. Even with the program likely facing a pretty substantial overhaul within the next 17 years, three external factors that you control help determine your monthly Social Security benefit.

Two of these factors are interconnected: your average annual earnings and the length of your work history. The SSA factors in your 35 highest-earning years when calculating your monthly benefit. For each year less than 35 that you worked, a $0 is averaged into your payout. Thus, the more you earn annually, and the longer you work (at least 35 years), the better chance you have of maximizing what you'll be paid from Social Security.

The third component is a biggie: the age you decide to claim Social Security benefits.

You can begin collecting benefits at age 62, or at any point thereafter. But the SSA dangles a pretty big carrot out there to entice seniors to hold off with their claim. For each year you hold off and don't claim Social Security after turning 62, your Social Security benefits grow by approximately 8% a year until age 70. This means that a person claiming at age 70 could have a monthly payment that's as much as 76% higher than someone else who claimed at age 62, assuming an identical earnings history.

Social Security cards and cash sitting atop a benefits scale.

Image source: Getty Images.

The really important figure that working Americans and seniors need to know with relation to their claiming age is their full retirement age, or FRA. Your FRA is the age at which the SSA deems you eligible to receive 100% of your monthly benefit, and it's determined by your birth year. If you claim benefits at any point between age 62 and one month prior to your FRA, you'll be taking a permanent reduction in your monthly payout of up to 25% to 30%. Conversely, if you claim benefits at any point after reaching your FRA, you'll see your payout increase above and beyond the 100% mark by as much as 24% to 32%.

Today's newest eligible retirees, who were born in 1955, have a full retirement age of 66 years and two months.

An illustration of what the average American would be paid by claiming at age 70

The simple explanation above would suggest that if seniors want more bountiful payouts in retirement, they should simply wait longer. However, the data suggests that's not what typically happens. The Center for Retirement Research at Boston College found that around 60% of retirees claim benefits between ages 62 and 64, with another 30% claiming at their FRA (either age 65 or 66). Just a meager 3% of retired workers waited until age 70 to maximize their monthly payout.

But for those who do wait, there's a pretty substantial reward. For those born in 1955, waiting to claim until age 70 means netting a 30.7% monthly increase in benefits over what they would have received at their full retirement age.

What might this look like over time? Let's take a look at what the average American claiming at age 70 and born in 1955 would receive in lifetime benefits. For our example, we'll use the average retired worker's monthly benefit, $1,365.35 as of the SSA's March 2017 snapshot, as our full retirement age baseline. Additionally, we're going to assume a cost-of-living adjustment (COLA) of 2% annually, which is pretty much in-line with what COLAs have averaged over the past two decades.

Waiting until age 70 to claim Social Security benefits could yield more than $552,000 in lifetime benefits by age 90.

Data source: Social Security Administration. Author's calculations based on a 2% annual cost-of-living adjustment for an individual born in 1955 and claiming at age 70. Chart by author.

As you can see, the clear disadvantage of claiming Social Security at age 70 is that you have to wait to receive income, which is probably why most seniors claim before or at their FRA. Of course, the advantage of waiting is that you'll be paid a heck of a lot more over the long run!

By age 79, which is really close to the average life expectancy in the U.S., you'll have received nearly $234,500 in cumulative income from Social Security by claiming at age 70. But, should you make it to age 90, you'll walk away with more than $552,000 in lifetime income. This is about $80,000 more in lifetime benefits at age 90 than someone who claims at age 62 and begins receiving benefits eight years earlier.

When claiming at age 70 makes sense

Although only 3% of seniors waits until age 70 to begin collecting Social Security, there are a few clear instances where it makes sense to wait as long as possible to sign up for benefits.

One great example are persons who have very little or nothing saved for retirement. While enrolling as early as possible in order to generate extra income might seem appealing, it's actually a really bad idea. If you don't have much saved for retirement, or perhaps nothing at all, it means you're going to be heavily reliant on Social Security income. If that's going to be the case, you'll want your payout to be maximized, which means waiting as long as possible to sign up. If you enroll early, your payment will be permanently reduced throughout the remainder of your life, which isn't optimal if that's your primary income source.

A senior woman holding a pile of cash.

Image source: Getty Images.

If you're in great health and/or have a family history of longevity, waiting to claim benefits might make sense. Though we have absolutely no way of knowing when our expiration date is, we can certainly use our family and personal health history to our favor. If you believe you'll live past age 80, waiting might be an appealing option to maximize your lifetime benefits.

Higher-income spouses also usually benefit from waiting as long as possible to claim Social Security. Having a significantly higher-income spouse hold off on filing for benefits allows their eventual payout to grow, which will provide a more sizable income impact for a couple later in life.

Deciding when to claim Social Security is a personal decision, but hopefully this should make it a little bit easier.