When considering early retirement, individuals encounter a difficult choice regarding their Social Security benefits.
They must meticulously evaluate the timing of benefit initiation and analyze the possible consequences of their decision on their future retirement income.
Lower Benefits with Early Claiming- Social Security
Prior to proceeding with early retirement plans, it is imperative to understand three critical aspects of one’s Social Security benefits in order to make an informed decision.
If you opt to receive your benefits upon reaching full retirement age, you will be granted the standard amount of your Social Security benefits.
However, opting to claim benefits before reaching full retirement age will result in early filing penalties.
These penalties cause a reduction in your benefits, computed as follows:
- A reduction of 5/9 of 1% for each of the initial 36 months before reaching full retirement age.
- A reduction of 5/12 of 1% for each month preceding full retirement age thereafter.
As a result, there is an annual decrease of 6.7% for the initial three years and an extra 5% reduction for each subsequent year before attaining full retirement age.
For instance, if you claim benefits at 62 years old with a full retirement age of 67, your benefits will be reduced by a total of 30%.
Shorter Work History, Smaller Benefits
Another crucial aspect to contemplate prior to early retirement pertains to your Social Security income computation.
This computation is based on your mean earnings over the 35 years during which you had the highest income, adjusted to account for inflation.
Should you opt for early retirement and lack a complete 35-year work history, years with $0 wages will be included in the benefits formula, resulting in a reduction of your benefit payments accordingly.
Limiting your work history to precisely 35 years, without exceeding this duration, may also lead to a decrease in your Social Security income.
Every one of the 35 years engaged in employment would be taken into consideration when calculating your benefits.
Given the typical trajectory of income increasing with age, choosing early retirement entails forgoing the opportunity to maximize benefits by substituting more of your lower-earning early career years with the higher salary typically earned closer to retirement age.
Impact of Returning to Work on Your Benefits
Finally, another important factor to contemplate before deciding on early retirement and commencing Social Security benefits is the potential consequence of reversing your choice.
If you have already begun receiving retirement benefits and subsequently decide to reenter the workforce, there is a limit on your earnings before the Social Security Administration begins withholding benefits.
If your full retirement age is within the present calendar year, you can receive earnings of up to $59,520 without experiencing any reduction in benefits.
However, for earnings beyond this threshold, benefits are reduced by $1 for every $3 earned.
Conversely, if you will not reach full retirement age during the year, you can only earn up to $22,320 before benefits are reduced by $1 for every $2 earned beyond that amount.