What Early Retirement Means for Your Social Security Benefits

Retiring Early Means Your Benefits Will Be Impacted

Older Man deciding if he should retire or not
••• Oleksiy Maksymenko / Getty Images

Early retirees can miss out on thousands in Social Security benefits because they don't know or understand the rules. Below are four important things you should know about how early retirement can affect your Social Security benefits. 

Early Retirement Means You May Get Less

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 years old.

The amount of benefits your statement says you will get at age 66 or 67 assumes you work until your 66th or 67th birthday. This means 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 thirty-five years of work history, your Social Security benefits may be lower than if you continue to work for a longer time period.

If you didn't work 35 years, Social Security will add zeros for each year you didn't work. All of those zeros will bring down your average and reduce the size of your check.

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 that you can delay the start of your Social Security benefits. This can help protect you from running out of money later in life.

Retire Early and Delay Social Security

You can always take early retirement and still wait until later to begin your Social Security benefits. This is a particularly important strategy for married couples who want to make sure their surviving spouse gets a larger benefit once they are gone.

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, plan for the higher earner between the two of you to delay the start of benefits to age 70 if possible. When married, the lower earner, however, should often start their benefits at an earlier age.

Pension Benefits and Your Social Security

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 that 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.

In addition, 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 and/or the Government Pension Offset.

For example, say your neighbor Lois worked as a teacher for 43 years, and in retirement, she expects to get her pension plus $1,300 a month in Social Security. She will be shocked when she learns her Social Security will be less than $300 a month due to the Government Pension Offset that applies if you get a pension for years of work where you were not covered under the Social Security system.

Working During Early Retirement Can Affect Social Security

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.

In 2019, you will lose $1 for every $2 you earn if you make more than $17,640. Once you reach the year of your full retirement age, you can make up to $46,920. Social Security will then take $1 for every $3 you make.

This reduction only applies until you reach your full retirement age, which is age 66 or 67 for most people. Once you reach full retirement age, you can earn any amount and your benefits will not be reduced.