How Does Retiring Early Affect Social Security?
February 24, 2021Retirement Wealth
What is it like for those who are planning to retire at the earliest age given by the SSA? How much do they get as social security benefits? And how can they not go broke?
The SSA's minimum age to retire is 62 years old. However, to retire early, the Social Security Administration indexes your earnings based on how long you’ve worked instead of the usual 35 years. This will cause your social security benefits to reduce.
Even though this is a downside to retiring early, there are quite a lot of upsides, especially if the retirement is based on genuine faith and not due to disabilities.
Table of contents
What are Full Retirement Ages and Their Estimation?
The term “Full retirement age” is a social security term that suggests a period when an individual is entitled to their total social security benefits without any reductions. Even though you can decide what age to retire, for the purpose of social security and getting the benefits you have gathered over the years, you might want to plan your retirement to get the most out of it.
Initially, when social security created the full retirement age, it aligned with that of Medicare. But it is changing as longevity increases and people these days live longer in retirement. So,now your full retirement age depends on your birth year. Depending on the period, it varies for several people. However, for the most part, it has been between the ages of 65 and 67.
Just so you’re not confused any further, as of now, your full retirement age is 66 if your birth year is 1954 or any time before 1954. That means, if you are 66 years old in 2020, you could have retired with full benefits. If you haven’t retired, then you should be making some great retirement plans now.
However, if your birth year is 1960 or anytime after 1960, your full retirement age is 67. That means if you were born in 1960, you would have about 6 years to retire after your 2021 birthday! It’s a time to look forward to! Still, start making plans! It’s not too late to make some investments so you can cash out and take a vacation in 6 years.
If you were born between 1955 and 1959, then your full retirement age is 66 years old plus 2 months for every year in between 1955 and 1959. So, being born in 1955 means that you can expect to retire with full benefits exactly 2 months after your 66th birthday. If it’s in 1956, you retire with full benefits 4 months after you celebrate your 66th birthday. If your birth year is 1957, you retire 6 months after your 66th birthday and with full benefits. You keep adding 2 months as the birth year graduates until 1960 when the full retirement age is exactly 67, no more and no less.
At your full retirement age, you get 100% of the benefits that you have accrued over the years. If you decide to retire before you reach your full retirement age, your full benefits get reduced by 6-7% of each year you take.
So if your full retirement age is 66 and you are collecting benefits at 62 you will have four years’ difference and your benefits reduced to 72 - 75% of what it should have been at full retirement. It’s worse if you were born in 1960 or after as retiring at 62 years old would mean you’re taking 5 years off your full retirement. You would be entitled to only about 70% of your full retirement benefits.
Dollar-wise, calculating monthly, it might not look like that much of a difference, but compounded year over year, especially if there are cost-of-living adjustments, then it is a very big personal decision to retire a couple of years before you’re entitled to full benefits.
There are lots of different rules and variations on what happens when you collect your benefits at certain times under certain circumstances.
What about Those Retiring Early Due to Other Issues?
Some people’s decision to retire early isn’t a decision made out of choice. Sometimes, people develop a medical condition that impairs them from work or that advises they stop work for the good or betterment of their health situation. When people reach 60 years of age or more, listening to the doctor’s advice to quit the corporate or factory world may be the best decision for them at the particular point. If it is for a medical reason, then retiring early may be the best decision.
If someone retires early due to severe medical and health issues, they may be eligible to apply for disability insurance.
If an individual chooses, however, to retire for other personal reasons, it is advisable that they consider their financial situation and the implications of their early retirement. If you’ve made the decision early enough in your career, then perhaps, you might have the time to make investments towards your early retirement. The investments you’ve made could cover the losses for your retirement decision and even provide more than enough for a good life. In this post, we talk about retiring early and how to make the best of that decision.
If you are considering getting your social security benefits earlier than it’s fully due, When you think about claiming Social Security early, the question you should consider is this: do you want to get as much money you can get from the government through social security, or do you want to reclaim your life sooner rather than later? There is a cost to whatever decision you make!
On the Social Security website, there is a free spreadsheet where you can input your earnings history for the past 35 years. With all the other financial resources available to you, and the burning desire to retire as early as possible, you must be willing to contribute up to an extra $500 monthly to your Social Security benefits so you can retire at your preferred age.
Understanding how Social Security benefits are calculated and how it impacts your total retirement benefits will help you make the best personal decision concerning retirement and perhaps, contributing towards it if you have to. If you are planning to retire early and you still have a few more years to do so, then you can plan towards it.
What are the Common Mistakes Associated with Retiring Early?
Some of the mistakes associated with early retirement include the following:
Retiring too Early
Let us assume that your full retirement age is 67, in other words, you were born 1960 or after and that your total benefit at full retirement age is worth $28,000. If you decide to retire at 62 and start collecting your benefits then, you would only be entitled to a total of $19,600 which is about 30% reduction. It would have cost you almost a thousand dollars a month.
If you wait till 63 or 65, the reduction is less but it still permanently reduces that benefit. For more clarity, assuming that you have a benefit of $1000 at full retirement age and you retire at 62, it is cut by 30% so now your retirement is $700. So if you live till 90, you will receive $250,000 on the reduced benefit compared to if you waited to full retirement age where you would have received $267,000.
Most people have Social Security Benefits that are two to three times that level, so the early retirement could cost as much as $120.
Working After Retirement
This mistake has to do with whether you are actively working on retirement and collection of social security benefits. This is called the annual earnings test and the rules here is that if you apply for your Social Security benefits before you reach full retirement age and you work one dollar, the benefits will be withheld for every two dollars you earn over $18,240 as indexed in the year 2020.
The benefits will adjust back when you reach full retirement age, so it is important to understand what the impact could be.
Not Considering Your Social Security Survivors
There are two key factors when considering survivor benefits, the age when the deceased spouse first claimed their social security benefit, and the widow’s age when they claimed the surviving benefit.
The reality is this mistake could be very costly for your spouse and you may not even take it into consideration when you think about collecting your own benefit.
How Does Regular Retirement Compare to Early Retirement?
For regular retirement you work, then you save, invest and you prepare your retirement fund. And when you retire, whatever savings and fund you have, you budget it and you try to make it last till the end of your days.
This is the reason why regular retirement can be one of the most expensive and unpredictable activities a person can go through because you are already reaching the retirement age, you have minimal income coming in and your health and energy are not what they used to be.
So when you are in that period it is harder to deal with the risks of regular retirement because the social security system is just meant to be a support to whatever retirees have, you need to have your own retirement plan.
Another thing about the risk of regular retirement is that you have unpredictable economic and political conditions. So essentially, what you are doing is saving up a huge amount, and you hope that it will last you for the rest of your days.
You do not know exactly what would happen when it comes to economic or political situations. If you are at the age that you have low energy and low momentum, then it would not be as easy to adapt to whatever the economic or political situations may bring.
The foundation of financial security is income and with regular retirement, you are giving up your income. You know you are older and just relying on your savings which is a huge risk and that is why it might be important to consider early retirement.
On the other hand, early retirement for some is to work, save and invest, but the reason why you are saving and investing is so that eventually you can transition into a work that you love and grow to earn a passive income.
The values you need to make this work are hard work, disciplined, investment, frugal budgeting restraint and you need to be healthy because.
You also need to develop the value of entrepreneurship, even though you are not starting a business. But you need to think like a business owner, be better with your investing mindsets, grow leadership skills, and be more courageous.
What are the Phases of Early Retirement?
Early retirement could be a much harder path, but at the same time could also give more joy and more fulfillment with proper planning. Here are the phases of retiring early and how to do it in each phase.
The goal is to understand and assess the rewards of earlier retirement, the path to recovery, what financial stability is, and what needs to happen before you reach the goal. Then you look at the risk of the transition and where you are today.
The goal here is you minimize your risks for the transition, and that can mean several things. But if this is done adequately, you can increase your income or side income from the work that you are about to transfer to, whether it is a business or a new job, or a totally new career.
More goals in this phase are improving your network for learning and developing key skills and the longer time you prepare, the better and less stress you have for the rest of the phases.
The goal here is to find stability and rhythm because when you start to resign essentially, you now control your days. So if you have been working an 8 to 5 every day, things are going to change.
Your job during this transition is to find stability and rhythm, you are going to have to rapidly learn and develop skills and get things done, even without a work environment pressure.
You have to master time and project management and establish sustainable routines for your health, work, and for your family life because the last thing you want to happen at this phase is that you burn out doing the work that you love.
The goal here is you take consistent action towards financial stability, and now the task is to find and stay on the right path to execute the right tasks with the right people while maintaining your sanity.
These things might be easy, but when you are actually in control of your own time and your own business, there is so much that can creep into your life that you are so distracted and not getting any progress towards financial recovery and stability.
This is why the number one task here is to find and stay on the right path and avoid all distractions. By the end of this phase, you should be getting back your old financial status and it will be slightly improved because now you are the one who defines the terms of your work routines, your play routines, the people you are working with, and the work that you are doing.
Here the plan is to scale beyond your previous life. This is where you go beyond your self-limiting beliefs, where you reach for and achieve your full potential. Also, when it comes to your potential, it just keeps getting higher as you achieve more and that is the essence of the phase.
About THE AUTHOR
With multiple family members currently in senior living facilities, David is in the trenches every week, learning the ins and outs of nursing homes, assisted living, memory care, and general senior living.Read more about David Bolton
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