Social Security provides critical benefits for millions of retirees. If you've paid into the system your entire life, you're probably eager to collect your money as early as you possibly can. But unless you're coming into retirement with a healthy nest egg, it probably pays to wait as long as you can to file for benefits, even if that means working longer in the interim.

How heavily will you rely on Social Security?

There's a reason so many seniors depend on Social Security to pay the bills: They don't have much savings of their own. In fact, the average household nearing retirement (aged 56 to 61) has just $163,577 saved for it, according to the Economic Policy Institute. Now, to be fair, this data is several years old, and it doesn't necessarily speak to other potential income streams. For example, you might have a household with $163,000 and change in an IRA, but if that same family also has a business it's planning to sell, that's a solid source of retirement income right there.

Pile of Social Security cards

IMAGE SOURCE: GETTY IMAGES.

The point here, however, isn't to precisely nail down how much savings the average older household has. Rather, it's to get you to evaluate how much savings you have, because that will dictate when you should file for Social Security. In a nutshell, the less money you have of your own, the more it pays to hold off on benefits.

Now, when you look at your nest egg balance, you might see a fairly large number on that screen or statement. But let's assume you have $500,000 socked away, which is about three times the aforementioned average for older households. As a general rule, you can expect to withdraw about 4% of your savings balance each year to avoid depleting it prematurely. If you have $500,000 in savings, that'll buy you about $20,000 of income annually. And when you look at it that way, that's not a whole lot. Therefore, you'll want to take steps to get as much money as possible out of Social Security -- and that means delaying benefits as long as you can.

Social Security: It pays to hold off

Your Social Security benefits themselves are calculated based on your earnings record. Specifically, your top 35 working years are considered when establishing your full monthly benefit amount. Then, once you reach your full retirement age, or FRA, as determined by the Social Security Administration, you'll be entitled to collect that full monthly benefit. Your FRA is a function of your year of birth, as follows:

Year of Birth

Full Retirement Age

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960

67

DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.

That said, you get an eight-year window to file for Social Security that begins at age 62 and ends at age 70. (Technically, you don't have to file at 70, but as you'll see in a minute, there's no reason to wait any longer.) If you claim benefits before reaching FRA, those monthly payments will be reduced. But if you hold off past FRA, you'll get an 8% boost for each year you delay. This means that if you're entitled to $1,500 a month at an FRA of 67, waiting until 70 will increase each payment to $1,860 -- for life. Once you turn 70, however, you can no longer continue to accrue the delayed retirement credits that give you that boost, which is why that's generally considered the latest age to file.

Of course, if you have a sizable nest egg and don't need your Social Security benefits to pay the bills, but rather want the money to enjoy more travel and leisure, then you may not want to hold off until 70. And frankly, there's no reason to make yourself wait if you're financially stable. But if you're counting on those benefits to cover a large chunk of the bills, then it pays to wait as long as possible to collect them. You may need to extend your career a few extra years to allow for that option, but it's a far better bet than jumping the gun on Social Security and suffering for it later in life.

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