How Does An Early Retirement Impact Your Social Security Benefits?

Most Americans spend their lives working hard and saving for their retirement years. However, planning for retirement can be overwhelming. It requires strategic and focused preparation in terms of budgeting, savings, and investments, among other things. According to a recent poll, the average retirement age in America increased from 60 years in the 1990s to 66 years presently. Further, the life expectancy figures in the country are also rising. An average American is likely to live until the age of 78.7 years, which means a retirement span of over 12 years. However, for Americans older than 65 years, the average income is still $38,515, and the average net worth is only $170,516, per the U.S. Census.

With these numbers, saving for retirement can be challenging. More so, early retirement statistics in the country are steeply rising, especially after the COVID-19 pandemic. The steadily rising average retirement age among Americans since the 1990s is now stalled. According to a recent survey, almost half of Americans (approximately 49.9%) are likely to retire before the age of 62. One of the reasons why Americans are choosing to retire early is because of the recent public health crisis that altered their priorities. Older Americans are especially more skeptical about returning to the office because they face a higher risk due to COVID-19. Over 3 million retirees took up early retirement because of COVID-19 related reasons. In other cases, the unprecedented soaring stock market, booming real estate prices, and more are urging Americans to take a step back. A large number of people are also considering early retirement as they want to truly unlock their golden years so that they can better enjoy their 60s. The ‘life is short’ mindset is pushing many people towards early retirement.

Alternatively, the early retirement age in America also varies by age group. The youngest - Generation Y - between the ages of 25 and 40 years wish to stop working by 59. Generation X, between 41 and 56 years, wants to retire by 60. Baby Boomers between the ages of 57 and 75 years are likely to work longer and retire by 68.

While there are multiple benefits of retiring early, such as more time to live your life, less stress, etc., the biggest risk is that you have to make your savings last longer than otherwise. Leaving the workforce earlier might put added pressure on your retirement savings. Apart from that, early retirement also affects your Social Security benefits. Social Security benefits for early retirement are much lower than if you take your Social Security withdrawals at the legal age (62 years) or until the full retirement age (FRA) (between 66 and 67 for a majority of Baby Boomers). If you delay your Social Security benefits until 70 years, Social Security adds an 8% credit to your projected monthly payout each year. You can consult with a professional financial advisor to assess if you have sufficient funds to opt for an early retirement and the steps you can take to ensure you build a comfortable retirement savings nest.

If you are considering taking early retirement, it is critical to know how an early retirement impacts your Social Security:

Impact of early retirement on Social Security benefits

Legally, you can take your Social Security benefits as you turn 62. However, the earlier you choose to take your Social Security benefits, the smaller your monthly checks will be. You could stand to lose as much as 30% more than you would have received if you waited until your FRA. To receive the full benefits, you should ideally delay your Social Security withdrawals until your FRA. If you further postpone your Social Security benefits until 70 years, you can increase your payout by 32% more than if you started withdrawing at your full retirement age. The delayed increase in Social Security benefits is more than you would have received through the cost of living adjustments (COLAs), an average of 1.5% per year, which Social Security beneficiaries have been getting since the last decade. The COLA enhancements often fall short to keep up with true inflation. Delaying your Social Security benefits until your FRA or even further is a much more beneficial choice. Even if you want to take early retirement, you could consider not withdrawing your Social Security benefits until your FRA or when you turn 70, if possible. According to a report, each year, people lose over $3.4 trillion in Social Security income because of claiming their Social Security benefits too early.

The Social Security Administration (SSA) uses your birth year to establish your FRA. Hence, your early retirement depends on the year of your birth. Here is a chart that can help you understand your full retirement year:

Born On (Birth Year)	Full Retirement Age
1937 or before	65 years
1938	65 years 2 months
1939	65 years 4 months
1940	65 years 6 months
1941	65 years 8 months
1942	65 years 10 months
Between 1943 and 1954	66 years
1955	66 years 2 months
1956	66 years 4 months
1957	66 years 6 months
1958	66 years 8 months
1959	66 years 10 months
1960 or later	67

When considering your birth year, the SSA considers those born on January 1 as born in the previous year. Hence, for someone born on January 1, 1957; 1956 would be considered as your birth year and full retirement year. Your Social Security calculator for early retirement assesses your FRA and accordingly estimates the percentage of reduced benefit.

Apart from your birth date, your Social Security credits impact your benefits. While you are working, you pay Social Security taxes and, in return, earn credits towards your Social Security account. Your credits determine your Social Security benefits along with your birth year. A person born in 1929 or later needs 40 credits to be eligible for Social Security benefits; 40 credits are usually ten years of work. Your credits remain on your Social Security record for a long time. So, if you take early retirement, your credits remain on your record. When you resume your job after a break, the new credits are added to your record. However, you do not get Social Security benefits for early retirement if you do not have the minimum qualifying credits.

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Consider deferring Social Security even when retiring early

In other instances, you can take early retirement but not withdraw your Social Security benefits even after you retire. This means you can take early retirement while continuing to enhance your Social Security payout much until age 70. The SSA does not allow you to delay your withdrawals after the age of 70. However, if you consider retiring early without your Social Security, you have to use your assets or retirement savings to fulfill your retirement expenses. Even though this puts high pressure on your retirement nest egg, this method of deferring your Social Security benefits can substantially create a longer lifetime income than taking your paycheck early.

This strategy of postponing Social Security benefits is even more advantageous for married couples that want to leave a higher amount of Social Security sum for their living spouse and kids. In case of the demise of a partner, the person with the higher monthly benefit between the couple will determine the survivor benefit amount for the living spouse. The living spouse cannot claim both benefits.

In this situation, if you want to increase your future survivor benefit, the higher earner from the couple can delay taking their Social Security withdrawals until the age of 70 to maximize the paycheck. The lower-earning partner can begin Social Security withdrawals early in life or take early retirement if they desire.

The impact of pensions on Social Security for early retirees

Pensions and taxes also affect social security benefits for early retirees. Some pension plans offer a much larger monthly sum if you take early retirement. However, the benefit automatically reduces when you start withdrawing from Social Security. It is important to understand how much your pension will reduce and how much you will owe in taxes when you start taking your Social Security withdrawals. It is not wise to assume that you will get a full pension and Social Security benefits.

Further, if you are a government employee or work in the education industry, your Social Security benefits might differ from what you expected because of the government pension offset (GPO) rule. Your Social Security sum is set off for the time you get a pension but is not covered under the Social Security benefit plan. If you received a pension from a job where you did not pay any Social Security taxes, the policy reduces your retirement benefits because of the Windfall Elimination Provision (WEP).

Apart from these aspects, taxes also affect your Social Security benefits for early retirement. If you have a provisional income higher than $34,000, you can expect to pay federal income tax on approximately 85% of their Social Security benefits. If you file a joint return, and your couple provisional income is between $32,000 and $44,000, you can likely pay federal taxes up to 50% of your Social Security benefits. However, in case your combined provisional income is higher than $44,000, up to 85% of your Social Security benefits may be taxable.

When ascertaining Social Security benefits in early retirement, consider all aspects, including your pension plans, GPO, WEP, and federal taxes. Knowing what you will get every month if you take an early retirement can help you effectively plan for the future. If you already have a Social Security account, use it to know your personalized retirement benefit and understand how different retirement ages impact your benefit amount. If you do not have a Social Security account yet, you can create one at www.ssa.gov/myaccount or use the online Social Security calculator for early retirement at www.ssa.gov/benefits/retirement/estimator.

Impact of part-time work on Social Security early retirement benefits

If you are taking early retirement from your full-time job but have plans to work part-time after retirement, you might want to check how your part-time work affects your Social Security payout. If you take early retirement and work part-time while withdrawing your Social Security benefits before your FRA, you might find your benefits are reduced because of the ‘Social Security earnings limit’ criteria. In 2022, if you decide to take the ‘retire early’ option while working part-time, your earning limit is $19,560. For every $2 you earn above this limit, your Social Security benefits are reduced by $1. Hence, in 2022, if you have a part-time job that pays you $25,000 a year ($5,440 above the maximum income limit), the SSA will lower your Social Security paycheck by $2,720. If you reach your full retirement age in 2022, your earning limit is $51,960. In this case, $1 in benefits is withheld for every $3 earned over the income limit. This is applicable until the date you reach your FRA. Your benefits stop reducing once you reach your FRA, irrespective of how much you earn.

If you have your own business, your earnings are your net income. However, if you receive wages or income from an employer, your earnings limit is calculated according to your gross pay. The earnings cap is applicable only on income from work and excludes any investments, annuities, pension, and capital gains. Further, if your Social Security benefits are lowered because you earned above the specific limit, your spouse and children will receive the reduced sum, irrespective of their income.

Consider a test retirement

Early retirement Social Security benefits might not be ideal, especially if your retirement living expenses are likely to be primarily dependent on your Social Security paycheck. Hence, instead of paying the Social Security early retirement penalty, it is advisable to consider a test retirement first and assess if you can manage an early retirement.

Most people want to retire early but do not enjoy the non-working phase so much and eventually get bored. According to a recent report, 39% of workers aged 65 have already taken retirement once but returned to work later. Evaluate your retirement readiness before you take early retirement to check if you want to step back or step away from the workforce. You could take a long leave of absence and return to work after a test retirement phase. If you feel refreshed post the testing phase, you may be able to work longer than before and push your Social Security retiring withdrawals further in the future.

To conclude

On average, a retiree can substitute 40% of their retirement income through Social Security benefits, provided they retire at their FRA. If you are considering retiring early, reassess if your retirement corpus will be able to sustain your living expenses during the non-working years. Moreover, regardless of whether you take Social Security benefits early or later, your retirement nest egg should be sufficient to support your retirement.

As you make your retirement plan, know how much you would need to sustain your living expenses and check whether early retirement is feasible given your early retirement plans. If early retirement is possible, determine how much Social Security benefits you will receive and the remainder corpus you need to build to live a financially secure retirement. To get expert guidance in retirement planning, you can also seek advice from a professional financial advisor and create a solid foundation for your future.

If you’re looking for a financial advisor who can guide you on how to maximize your Social Security benefits and align them with your retirement plans, use the free advisor match service and get matched with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.