How Does An Early Retirement Impact Your Social Security Benefits?

Early retirement is no longer just a dream or a fad; it's a viable option. It is a lifestyle choice that is here to stay. Increasingly, people are realizing that personal happiness matters more than climbing the corporate ladder indefinitely. Giving up professional stress for a slower, calmer life is the need of the hour for most people. Early retirement can provide you with more time with your loved ones and bring you peace of mind. It may even represent financial freedom and the ability to live life on your terms without depending on a paycheck.

However, the last part, financial freedom, does not happen by chance. It may take years of making prudent money decisions. A key component of this equation is Social Security. For most retirees, Social Security benefits comprise a significant portion of their retirement income. But the age at which you choose to start taking these benefits can impact how much you receive for the rest of your life. If you decide to retire early and start collecting Social Security early, your monthly benefit will be permanently altered.

So, if early retirement is on your radar, you need to plan for how it affects your Social Security benefits. The better your plan, the more likely you are to enjoy the freedom of an early retirement. Let's explore the impact of early retirement on Social Security.

Does retiring early affect Social Security?

Well, the short answer is yes. Retiring early can impact your Social Security benefits. The earlier you retire, the earlier you may want to start withdrawing your Social Security income. However, doing so usually reduces the amount you receive each month. Typically, you can claim your full benefits at your full retirement age, which is between 66 and 67, depending on your birth year. For those born in 1960 or later, the full retirement age is 67. For someone born in 1955, it is 66 and 2 months. To know your exact full retirement age and how early retirement will affect your payout, you can use the Social Security Administration's calculator.

What happens to your Social Security if you retire early?

Ok, now let's get into the details. Your Social Security retirement benefits are not a fixed check that is credited into your bank account when you stop working. The value of each check depends on your age and when you start taking it. So, the decision to retire early and start claiming benefits can have a permanent impact on your monthly income.

As per the prevailing rules, the earliest you can claim Social Security retirement benefits is age 62. But starting that early results in smaller checks for the rest of your life. The Social Security Administration (SSA) reduces your benefit if you claim it early because you will be collecting it for a longer period of time. If you had waited until your full retirement age, you would have likely claimed fewer checks, and so they could have been bigger. Your full retirement age depends on your birth year, as explained above.

The decision to retire early and claim your benefits at 62 or any time before your full retirement age would also affect your loved ones, especially your spouse if you are married. A spouse is typically eligible for up to half of your primary insurance amount, but if you start taking benefits early, their benefits will be lower, too. This can be a significant concern for couples who rely on Social Security as a substantial part of their joint retirement income.

You might wonder why Social Security does this at all. After all, is it not your money? Not exactly. Social Security is funded by current workers who support the benefits of current retirees. All through your working career, you contribute to the system. If you retire, the workers who come after you do the same. However, when people retire earlier, they start drawing benefits sooner and for a longer period. At the same time, they stop payroll tax contributions that fund the system. To keep things balanced, the Social Security Administration reduces early benefits so that, over a lifetime, the total payout is roughly equal whether you retire early or on time.

How is Social Security calculated for early retirement?

Now, if you claim your benefits before your full retirement age, the benefit is reduced by 5/9 of 1% for each of the first 36 months you claim early. If you claim more than 36 months early, the benefit is further reduced by 5/12 of 1% per month beyond that.

Say, if your full retirement age is 67 and you start claiming your Social Security benefits at 62, that is roughly 60 months early. In this case, there could be a 30% permanent reduction in your monthly check. If you were supposed to receive $2,000 a month at full retirement age, you would only receive around $1,400 a month if you start receiving benefits at 62. A pretty big difference, right? Yes, it can be, and the important thing is that it will last for the rest of your life.

The way in which the Social Security Administration figures out your benefit is based on your highest 35 years of earnings, adjusted for inflation. They calculate your Average Indexed Monthly Earnings (AIME), which is basically your lifetime earnings record computed to a monthly average. Your benefit is then based on that number. If you stop working before you have logged 35 years of earnings, the Social Security Administration will plug in zeros for those missing years. Those zeros can drag down your AIME, resulting in a smaller monthly benefit. Even if you already have 35 years of earnings but choose to retire early, you miss out on potentially higher-earning years that could have replaced lower ones in your record, which could have boosted your benefit.

The grass is greener on the other side, though. If you choose to wait to claim your benefits beyond your full retirement age, your monthly check grows by about 8% for every year you wait, up until age 70. So, if your full retirement age is 67 but you hold off until 70, you could collect 124% of your full benefit amount. That can make a big difference, right there!

What if you don't fully retire early, but instead transition from full-time to part-time employment?

Many people opt for part-time work in retirement. You may also consider this option. However, this, too, will affect your Social Security benefits. The Social Security Administration has no issues with you continuing to work and collect benefits simultaneously. However, if you are younger than your full retirement age and earn more than a certain amount, your benefits may be temporarily reduced.

Now, for a part-time job, the Social Security Administration essentially considers wages from that job, including vacation pay, bonuses, and commissions. If you are self-employed and running a business, the net earnings from your business would be considered your income for the year. However, the money you earn from a pension or annuity plan, interest from assets, investment income like stock returns, 401(k) withdrawals, etc., veteran's benefits, or other retirement benefits are not considered earnings and will not interfere with your Social Security checks.

One more thing to keep in mind is the year in which you earn your income. The Social Security Administration looks at income based on when it is earned, not necessarily when you get the money in your hand.

So, let's say you earn income in 2025, but your company does not cut the check until early 2026. The Social Security Administration will still count all of that as 2026 income because that is when you earned it. If you are self-employed, the Social Security Administration only counts your net earnings, not your gross. And in this case, too, it is not about when you did the work but when you actually get paid. Therefore, if you completed a significant project in December 2025 but your client pays you in January 2026, that income will be counted for 2026 and not 2025.

Here’s how your benefits are reduced if you earn while collecting Social Security:

For 2025, the Social Security Administration will withhold $1 from your Social Security check for every $2 you earn over $23,400.

Things are different in the year you reach your full retirement age. In that case, for 2025, the earnings limit is $62,160, and the reduction is only $1 for every $3 earned above the limit. Even better, they only count earnings before the month you reach your full retirement age. Starting with the month you hit that milestone birthday, you can earn as much as you want without losing a single dollar of your Social Security benefit.

However, keep in mind that, unlike the reduced checks, this is not money you lose forever. Once you hit full retirement age, the Social Security Administration will recalculate your benefits and give you credit for those months where your benefits were withheld. So, your future payments will effectively increase.

Also, while your checks get reduced, there is some good news here. Working while collecting your Social Security benefits can actually boost your future payments. As long as you are still working, you will continue to pay Social Security taxes. The Social Security Administration reviews your record every year to see if your recent earnings were high enough to replace one of your lower-earning years in your 35-year earnings history. If they were, they would recalculate your benefit, and you would qualify for a new, higher check.

So, part-time work in early retirement can help you increase your Social Security benefit down the line, even if it lowers your check right now.

Things to consider before you retire early and start collecting your Social Security benefits

Early retirement and Social Security are deeply intertwined, and understanding the nuances is essential. First things first, there is no perfect retirement age that works for everyone. You really need to think about what you want this next phase of life to look like.

Are you ready to stop working completely, or would you like to ease into retirement with a part-time job? Both options have very different implications for your Social Security benefits.

If you start taking Social Security before your full retirement age, your monthly check will be smaller permanently. However, you will receive those checks for a longer period. If you wait until your full retirement age or even better, until age 70, you will get a larger benefit, but for fewer years. So, you have to do the math:

Do you prefer smaller checks for a longer period or larger checks for a shorter period?

It is also essential to understand that retiring does not mean you have to claim Social Security right away. If you have other savings, like a 401(k) or Individual Retirement Account (IRA), you might choose to use those first and delay Social Security until later. In fact, waiting until 70 can grow your benefit by about 8% per year after your full retirement age. It is definitely a conversation worth having with your financial advisor. Your decision also sets the base for the amount you will receive for the rest of your life, so it is not something to take lightly.

Here are a few other aspects to consider before deciding:

• What is your working situation?

If you are working and you claim early, your benefits might be temporarily reduced if your earnings exceed the annual limit set by the Social Security Administration.

• Are you a spouse claiming benefits on someone else's record?

If you are a surviving spouse or a divorced spouse, you can claim survivor benefits now and delay your own benefits until later. So, you can claim one set of benefits (spouse’s) and let the other (your own) grow in the meantime.

• How long will you likely live?

If you are in excellent health and have a family history of longevity, delaying benefits could result in a significantly higher lifetime payout.

To be or not to be – to retire or not to retire (early)!

You can surely retire early if that is what you want. Early retirement can be a fantastic lifestyle choice. But it is not something you decide on a whim. Several factors require your attention, primarily Social Security. If possible, consider delaying your checks to receive a higher benefit later.

However, if the reduction in Social Security benefits does not significantly impact your lifestyle, for instance, if you have already accumulated sufficient wealth or prefer to let your investment accounts continue to compound, you may choose to claim Social Security earlier and leave your other investments untouched. This can help your retirement portfolio grow over time.

Remember, the decision you make today affects not only your income but also your spouse's future financial security. Take the time to run the numbers carefully and consult a financial advisor before finalizing your strategy.

Use the free advisor match tool to get matched with 2 to 3 financial advisors who can guide you on the impact of early retirement on Social Security benefits. This online tool connects you to retirement planners and financial advisors near you in just a few clicks.