A typical Social Security strategy could cost you $182,000

Americans are fascinated with getting the most out of Social Security, but many retirees are making a strategic mistake that can cost them tens of thousands of dollars in lifetime benefits, according to new research from economists at Boston University and the Federal Reserve Bank of Atlanta. 

The analysis examines the issue of the optimal age to claim Social Security in order to maximize retirees' lifetime discretionary income, or money after taxes, living expenses and other essential costs. The Social Security Administration pays a worker's full benefits at what it calls "full retirement age," which ranges from 66 to 67 years old, depending on your birth year. 

But people can also claim Social Security as soon as they turn 62, with the tradeoff of a roughly 30% reduction in their monthly checks. On the flip side, if workers wait to take Social Security until they turn 70, they get a 32% boost in their payments in exchange for holding off. 

The reality, however, is that only 6% of U.S. workers wait until they turn 70 to claim Social Security, even though the vast majority would be better off to wait until then to trigger their retirement benefits, the researchers found. 

$182,000 hit

There's a very real price tag to claiming Social Security too early, as the typical worker is leaving about $182,000 in lifetime discretionary income on the table by claiming before they turn 70, the report noted — income that most Americans could sorely use given that many haven't saved enough to carry them through old age. 

Almost half of Americans claim Social Security before they hit full retirement age, and about one-quarter claim at age 62, according to data from the Social Security Administration. 

Americans "have to change their thinking," Laurence J. Kotlikoff, one of the study's' co-authors and an economics professor at Boston University, told CBS MoneyWatch. "They think they will die tomorrow, and that leads people to jinx themselves" by claiming too early. 

Some people decide to claim Social Security early based on the average life expectancy for 65-year-olds, which is 83 years for men and 85 for women. But a better rule of thumb is to consider what Kotlikoff and his co-authors call "the worst outcome, financially speaking" — living until one's maximum age of life, which could be in the upper 90s or even 100 years old. 

The bottom line is that "we can't count on dying on time," said Kotlikoff, who writes about retirement at Maximize My Social Security and is a co-author of "Get What's Yours," a guide to the Social Security program. Instead, Americans should use financial strategies that can help them delay when they claim Social Security, which will boost their lifetime discretionary income, he said. 

An extra eight years of benefits? 

However, claiming at 62 could give a retiree an extra eight years of Social Security income that they could spend or save compared with waiting until age 70 — a tempting offer for someone who believes  that money could be put to good use at that moment, such as toward living expenses or savings. 

And people who worry they might not have as many years ahead of them as their compatriots might also be tempted to claim early to enjoy the benefit while they can.

Take an unmarried worker who is currently 60 years old and earns $80,000 a year. She'll be able to claim her full benefit of $35,337 per year when she turns 66, according to the SmartAsset Social Security calculator. She could also claim when she turns 62, but with a reduced annual payout of $26,502. Nevertheless, she'll enjoy eight additional years of those benefits, or an extra $212,016 over that time. 

To be sure, she'll get more money annually if she waits until she turns 70, with her Social Security payments bumping up to $46,947 per year. That represents 77% more income than if she claims her benefit at 62. But she'll need to collect for more than 10 years at that higher payment level until she breaks even with what she would have received via an extra eight years of benefits from age 62 to 70. 

To be sure, people think that dying before they claim Social Security is a "terrible waste," Kotlikoff said. But, he pointed out wryly, "If they die without Social Security, they won't need money." In his view, Americans should think like an economist and hold out for the maximum amount of benefits — although humans are notoriously not entirely logical when it comes to money decisions. 

"Find a job"

Almost half of Americans over 55 lack any retirement savings, which means those workers will be more reliant on Social Security in their old age and may be tempted to claim early in order to have a steady stream of income as soon as they turn 62.

But Kotlikoff said people who remain physically active when they turn 62 should stay in the labor market rather than claim Social Security because by maximizing their benefits, they'll be better off in the long run. The only people for whom it might make sense to claim early are people with a terminal disease or who are disabled, he added.

"Most people who are retiring early are able-bodied, so for those people it's a fantastic labor market — they should go find a job and work," he said. "The fact that we are retired longer than we work is nuts."

Aside from working longer, there are a number of other strategies that workers can tap to help put off claiming Social Security until full retirement age or older. For one, people with retirement savings in a 401(k) or other accounts can draw down that money first, he noted. Cost-saving measures like moving in with relatives or taking a loan from a family member can also help tide you over until you reach 70.  

Save more

Of course, a flip side to waiting to claim Social Security is a reduction in possible cash flow when someone is in their early to mid-60s, the paper noted. But the analysis found that the impact of delaying Social Security on household cash flow might not be as big as some fear. 

"We found that [waiting to claim Social Security] reduces people's spending at the median by 7% — the message being that people think they would have nothing to live on, but a lot of people have resources" beyond Social Security, Kotlikoff said.

Overall, Americans also need to put far more money away for their old age, he added. People think they'll need savings of $1.25 million to ensure a comfortable life in their golden years, according to a recent Northwestern Mutual study. And yet the typical U.S. retirement account holds less than $87,000. 

"People have been relying on Uncle Sam and their employer to take care of them, and we've seen the consequences," Kotlikoff said. "It's time for some tough love."