As of 2017, you receive one Social Security credit for every $1,300 you earn during the year, up to a maximum of four per year. As long as you have at least 40 work credits, early retirement won't jeopardize your Social Security eligibility; if you've been working for at least 10 years, you likely have enough credits to retire early.
But even if you have enough credits and have figured out how to retire early, you might want to reconsider any plans to stop working before your official retirement age if you're counting on Social Security benefits as a significant part of your retirement income. Early retirement can have a major impact on the amount of benefits you receive — the earlier you retire, the less money you could receive from Social Security. So that you can better plan on when to retire, understand how your retirement age affects your Social Security benefits.
Fewer Working Years Can Reduce Social Security Benefits
The amount of your Social Security benefits is based on the average of your 35 highest-earning years of your working life, with the amount of wages that you earned in any given year indexed for inflation, which is used to calculate your primary insurance amount. If you retire early, and as a result don't have 35 years of wages, you'll have years in which the calculation will include zero earnings, which will reduce your average indexed monthly earnings.
The earlier you retire, the more significant the impact will be. For example, if you retire at 50, it's much more likely that you won't have 35 years of significant earnings. But, if you're retiring at 64, you'll have a lot more years of earnings to increase your average and your Social Security benefit amount.
Benefits Decrease If You Claim Prior to Full Retirement Age
The earlier you retire, the sooner you need to start relying on your savings to replace a steady paycheck. Depending on how much you've saved, that could mean you're forced to take Social Security benefits earlier, resulting in smaller benefits over your lifetime.
Your Social Security benefit amount is also adjusted based on when you start claiming your Social Security retirement checks; therefore, you will earn more from Social Security if you wait until your full retirement age. Social Security retirement age ranges from 65 for people born before 1938 to 67 for people born in 1960 or later. If you claim benefits before your full retirement age, your benefits are reduced. For example, if your full retirement age is 67 and you start taking benefits as soon as you're eligible at age 62, your benefit will be about 30 percent less than what you would receive at full retirement age.
Working Part-Time in Retirement Can Impact Benefits
If you continue to work part-time or start your own business after you've officially retired, that can affect how much you receive from Social Security. Additionally, the earning limits are low; so you might not receive the benefits you're counting on if you don't plan ahead carefully for your early retirement.
If you claim benefits in any year that you don't reach full retirement age, your Social Security benefits will be reduced. For 2017, the Social Security benefits you receive are reduced by $1 for every $2 over $16,920 you earn during the year. For the year you reach full retirement age, your benefits decrease by $1 for every $3 you earning in excess of $44,880 in the months prior to reaching your full retirement age. Once you reach your full retirement age, however, you can work as much as you want without affecting your Social Security benefits.
However, earnings only include money you make from working, including earnings that you contribute to a retirement account or pension plan. Income from investments, like capital gains, interest, and dividends, or distributions from retirement plans and pension benefits, will not reduce your Social Security benefits. So, if you have other income streams that aren't wages, your Social Security benefits won't go down.
Early Retirement Can Affect Spousal Benefits
You might not be the only one who could receive lower Social Security benefits because of your decision to retire early. For instance, if your spouse doesn't have as strong of an earning history as you do, your spouse can claim benefits based on your Social Security record. Although, if you weaken your earnings history by retiring early, your spouse's benefit might also decrease based on your record.
Engage in Retirement Planning Early
The decision to retire early might lower the Social Security benefits you will receive, but that doesn't mean you have to work forever. Being aware of the impact on your Social Security benefits will help you engage in retirement planning to make your investments work for your retirement budget. That way, you can better ensure your golden years are what you dreamed they would be.