Early retirement gives you more time to enjoy your later years, but it can be harder to do if you don’t have a lot of money to spend.
Unfortunately, leaving the workforce at a young age can sometimes mean missing out on a significant chunk of your Social Security checks, an important source of income that can provide much-needed support to retirees in their later years.
This is why early retirement could end up costing you when it comes to your retirement benefits.
Retiring early can affect your Social Security checks
Many people who want to retire early will find that they don’t have enough income to support themselves if they don’t start their Social Security benefits when they leave the workforce.
After all, if you stop working in the early 60s, you have less time to save than if you had stayed longer at work. And you should be even more careful when choosing a safe withdrawal rate from your retirement savings, because your money should support you longer.
The problem is that if you are forced by early retirement to start collecting Social Security checks, you are more likely to claim full retirement age, or FRA, which is between 66 and 2 months and 67 depending on the year you are. born. Starting checks before your FRA is considered an early filing.
Sanctions are accrued monthly for early filers, and they result in a permanent reduce the size of your checks. Each month you previously filed will reduce the checks by 5/9 of 1% for the first 36 months and by 5/12 of 1% for each month prior to that time. In other words, each of the first three years that you have applied for checks ahead of schedule results in a 6.7% reduction in benefits, and each year before that there is an additional 5% discount on your checks (for a maximum reduction of 30%.
While that may seem like a small price to pay for being able to retire when you’re still young, remember that these checks are probably your nothing but guaranteed source of income that lasts for the rest of your life. If you run out of savings, these benefits are still there for you — and you may regret reducing them if you retire late and it’s too late to go back to work.
A decision to forgo bigger checks could also affect your spouse if you earned more than she did during your marriage. That’s because applying for benefits early not only lowers your monthly income, but also lowers survivor benefits. If you die first, your surviving widow(er) will have less income to live on and may get into financial difficulties as a result.
Many seniors also receive fewer Lifetime Social Security benefits if they start their checkups early, because those who outlive their expected lifespan are better off with a delayed claim. Since you work hard to pay for this benefit program and earn your Social Security checks, it can be something you will regret if you don’t maximize your lifetime income.
Ultimately, you need to decide whether early retirement is worth the cost of cutting Social Security benefits for you and possibly your surviving spouse. But be sure to consider this trade-off when assessing the timing of your retirement and how that factors into the downsides of starting collecting your checks earlier than planned.