People who retire early and start drawing Social Security right away typically get less money from Social Security than they would have if they waited until their full Social Security eligibility age. But if you plan strategically, you can find ways to increase your retirement income, including your Social Security benefits, even if you decide to retire early.
1. Early Retirement Gives You Time to Maximize Benefits
Just because you retire early doesn't mean you have to draw Social Security benefits early. If you can afford to live off other sources of income, such as investments, when you retire early, or you work a part-time job, for example, you can wait to collect full Social Security benefits at your full retirement age. If you were born after 1960, your Social Security age for full benefits is 67.
The Social Security Administration distinguishes between your retirement age and your "stop work age." Because the SSA bases your retirement benefits on a 35-year average of your taxed earnings up to your retirement age, years in which you have no income result in a zero being included in that average calculation, which can lower your potential benefits. Use the SSA's benefits estimator to see how your early retirement could impact your benefits before you quit your job.
You can start collecting Social Security benefits if you're retiring at 62 — which is the SSA's early retirement age — but your benefits could be reduced by as much as 30 percent. If you can, wait as long as possible to claim benefits. You can earn as much as an 8 percent yearly rate of increase if you delay collecting benefits past your full retirement age up to age 70.
Your early retirement could free up the time you need to evaluate the retirement lifestyle you want. Factor in the Social Security earnings average and earnings limits to determine when the best time for you to collect benefits will be.
2. You Can Spend Early Retirement Growing Investments
Talk to a financial advisor to help you determine how much you need to save for retirement because your retirement age can be partially determined by your investments and savings. You should plan on having between 70 percent and 90 percent of your current income to live off of during retirement, according to the Department of Labor.
If you study your retirement accounts and investments and determine you already have enough money to meet your needs in retirement, then you could consider retiring early. During your early retirement, you could spend additional time enhancing your investment strategy and building savings that earn compound interest in order to generate more passive income. The more passive income you have, the longer you could delay collecting benefits in order to get the maximum Social Security benefits possible later on.
Additionally, you can use other income sources to pay off your debt as fast as possible. Being free of debt can enable you to further maximize how you budget your income and Social Security benefits.
3. You Can Retire Early From One Job to Pursue a Second Career
How you define early retirement is up to you. You might retire from one job or career in order to go back to school or pursue a new career. So you could be retired from one perspective but only partially retired or not retired from another perspective.
Working for at least 35 years can help you maximize your Social Security retirement benefits calculated according to your earnings average. Ultimately, the longer you work and the more earnings credits you rack up, the higher your Social Security retirement benefits will be.
4. You Can Have Your Benefits Recalculated at Full Retirement Age
The SSA reviews its records each year. If you increase the amount you earn, the SSA will recalculate your average indexed monthly earnings to determine your monthly benefits.
If you stop working or retire early for a period of time and then start working again or earn income from royalties on a published work, for example, then the SSA will recalculate your average, potentially yielding you a higher benefit amount. So, if you retire early to finally finish that novel and it's a best-seller, or you invent a product that takes off, you might have just boosted your Social Security benefits, too.
Additionally, when you reach full retirement age, your earnings no longer negatively affect your benefits. If you claimed benefits early at a reduced rate, then your benefits would be adjusted at your full retirement age to the full benefit you qualify for, regardless of your earnings, according to the SSA.
5. You Can Use Your Spouse’s Retirement Age to Your Advantage
If you're married, coordinate your retirement timeline with your spouse. Talk to your spouse about whether you both want to retire at the same time or not. If one of you is closer to full retirement age, you could decide that whoever is closest will wait to retire at full retirement age to get full Social Security benefits and the other can retire early and collect reduced benefits. Your timing could result in a greater total amount than if you both started collecting benefits before full retirement age.
If you are eligible and want to collect Social Security spousal benefits and retirement benefits, you have to start collecting both at the same time. As of November 2015, you can no longer delay one type of benefit over the other in order to receive higher benefits, according to the SSA. If you suspend your retirement benefits, your suspension also applies to your spousal benefits.
Look into spousal or survivor benefits if you're divorced or widowed. The rules vary depending on your circumstances, but you could qualify for more benefits if, for example, the benefit you are entitled to receive based on your earnings is less than the benefit you would receive based on your ex-spouse's earnings, according to the SSA.
Stephanie Barbaran contributed to the reporting for this article.