Why Most Retirees Lose Thousands in Social Security Benefits

Every day 10,000 boomers retire. Most of them immediately file for their Social Security retirement benefits. In so doing, they are generally losing tens to hundreds of thousands of dollars in lifetime income.

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Taking benefits right away can cost you big time in two ways.

First, you receive much smaller Social Security retirement benefits for the rest of your life. Taking your retirement benefit at 70 — which only 2 percent of us do —means a 76 percent higher check each month (after adjusting for inflation) than taking it at the earliest age possible, 62 — which over 40 percent of us do.

Second, if you take your Social Security retirement benefit before 70, you can lose the opportunity to take another benefit before 70 while letting your retirement benefit grow.

Let me give you an example of what I mean, with Joe and Sally, who just turned 62 and retired. To make things simple, let's assume they earned the same amount annually and that their full Social Security retirement benefit is $3,000 per month.

Joe and Sally head down to their local Social Security office and meet Joan, who encourages them to take their retirement benefit right away because they could otherwise die and end up getting nothing for all their years of contributions.

Joan's words are just what they were thinking. So they file for their retirement benefits and start collecting $1,875 a month from Social Security. This is only 75 percent of the $3,000 benefit they’d get by waiting until Full Retirement Age (66), and less than half the $3,960 they'd receive were they to wait until 70.

Joe and Sally know all those numbers and they are in excellent health. But like Joan said, "Why risk dying and getting nothing? A bird in the hand beats two in the bush."

Now fast forward a day. Joe and Sally are out kayaking on a category 5 river. They've never kayaked in their life and 5 sounds like a low number. It's not. It's the most dangerous river rating. Joe hits the first set of falls and ... well, he's gone. Sally is devastated, but hears at Joe's funeral that she can collect Joe's Social Security retirement benefit as a widow’s benefit and heads straight over to see Joan.

Joan says, "Sorry to hear about Joe. Nuts to try a cat 5 river. But we all make mistakes. Now about widow’s benefits. Here's the deal. Since you took your retirement benefit early, Sally, we're not going to give you two benefits at once. That would be double dipping. But we will give you an excess widow’s benefit, in addition to your retirement benefit. You'll get it every month and it will be adjusted for inflation. Let me calculate what it will be.”

Joan disappears for a half hour, does the calculation, returns and says: “Well, your monthly excess widow’s benefit will be zero. I just double-checked and it's calculated as the difference between your widow’s benefit and your retirement benefit. Your widow’s benefit is always going to be lower than your retirement benefit because Joe took his retirement benefit early. Had you waited to take your retirement benefit, you'd be able to collect $3,000 per month through age 70 and then collect $3,980 per month thereafter. But you didn't. So sorry. Have a good day."

Sally is thunderstruck. She's not only lost Joe, who she loved deeply, she's also lost a ton of money.

But Sally consoles herself by telling her friend Jane that she's definitely not going to make it past 70 because her sister died at 58. So at least she'll get her own retirement benefits before she joins Joe.

The years roll by. Sally hits 70. And then she makes it to 80, which she really can't believe. And then 90. She tells her doctor: “Every day I wake up and kick myself for taking retirement benefits early."

Her doctor says: "You are as healthy as a horse. My bet is you'll be one of the 3 million centenarians the U.S. Census Department predicted could be around by now. Have a good day."

What explains Joe and Sally’s behavior?

I think people are strongly superstitious when it comes to longevity. My hunch is that they ignore the possibility and the associated major financial risk that they could live long lives because they fear that thinking about this will jinx them.

Laurence J. Kotlikoff Laurence Kotlikoff is a co-author of “Get What’s Yours from Social Security” and a professor of economics at Boston University. Read More