Early Retirement and Social Security
The estimates you see on your Social Security statement are based on working until that stated age. For example, if your Social Security statement says you will get $1,100 a month at age 62, that estimate assumes you’ll work until you turn 62. The amount of benefits that your statement says you will get at age 66 or 67 assumes that you will work until your 66th or 67th birthday. This means that if you take early retirement, your benefits are likely to be less than what you see on your statement. Social Security benefits are calculated based on your highest 35 years of work history, with the highest 35 determined after each year of work has been indexed for inflation. If you take early retirement, and you do not have a full 35 years of work history, your Social Security benefits may be lower than if you were to continue to work for a longer time period. Even if you retire early, be careful about taking your Social Security benefits at age 62 without doing an analysis first. In many cases, it is better to find other sources of funds to finance your early retirement so you can delay the start of your Social Security benefits. That can help protect you from running out of money later in life.
Retire Now, Claim Later?
You can always take early retirement and still wait to begin your Social Security benefits. That is a particularly important strategy for married couples who want to make sure the surviving spouse gets a larger benefit later in life. The highest monthly benefit between you and your spouse is what will become the survivor benefit amount when one of you passes—at that point, you’ll only get that higher benefit amount, not both amounts. For the purpose of maximizing your future survivor benefit, you may want to plan for the higher earner between the two of you to delay the start of benefits to age 70 if possible. The lower earner, however, may want to start their benefits at an earlier age.
Pension Benefits Can Lower Earnings
Some pension plans offer a larger initial monthly benefit when you take early retirement; the pension benefit then automatically goes down when you become eligible to draw on Social Security. If you are not aware of this, you may think you will get your full pension benefit plus Social Security. Not all pensions work this way, so attend all classes or seminars offered by your employer to make sure you fully understand your pension and health benefits prior to taking early retirement. Ask plenty of questions, and set up a one-on-one appointment with a benefits advisor or HR (human resources) person if you can. If you worked in education or for the state or a government entity, be aware when you do begin your Social Security benefits that they may be less than what your statement shows, due to something called the “windfall elimination provision” or the “government pension offset.” For example, suppose your neighbor Lois worked as a teacher for 43 years, and in retirement she expects to get her pension plus $1,300 per month in Social Security. She will be shocked when she learns that her Social Security will be less than $300 per month due to the government pension offset that applies if she gets a pension for years of work where she was not covered under the Social Security system.
Part-Time Work May Reduce Pay
If you plan on working part-time during early retirement, you may find your Social Security benefits reduced. The reduction is based on something called the “Social Security earnings limit,” and it only applies if you have not yet reached full retirement age. If your income is higher than the earnings limit, your benefits will be reduced. This reduction only applies until you reach your full retirement age, which is age 66 or 67 for most people—but do not worry, those social security benefits are not lost forever. Once you reach full retirement age, your benefit will increase to account for the amount withheld earlier, and you can then earn any amount, and your benefits will not be reduced.
