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As you approach retirement, you must decide when to start receiving your Social Security retirement benefits. You may elect to start receiving Social Security retirement benefits at age 62 rather than waiting until normal (full) retirement age.
If you start receiving retirement benefits early, you will get less per month than if you start receiving them at normal retirement age. This benefit reduction will be permanent.
If your benefit will be based on your own earnings record, it will be reduced by 5/9th of 1 percent for each month of early retirement up to 36 months, and by 5/12th of 1 percent thereafter. If your benefit is based on your living spouse's record, it will be reduced by 25/36th of 1 percent for each month of early retirement. If your benefit is based on your deceased spouse's record, it will be reduced by 19/40th of 1 percent for each month of early retirement.
If your normal retirement age is 67, your benefit will be reduced by 30 percent if you choose to retire at age 62.
You must be eligible to receive early retirement benefits. In general, you must be:
If you elect for early benefits, you will receive more checks than if you elected at normal retirement age. For instance, if your normal retirement age is 66 and you retire at age 62, you will receive 48 more benefit checks than you will if you wait until normal retirement age to retire. Even though your benefit at age 62 will be 25 percent less than it will be at age 66, those four years of extra benefit checks add up to a lot of money. Generally, it will take approximately 12 years for the overall value of your retirement benefits taken at normal retirement age to begin to outweigh the value of reduced benefits taken at age 62.
Investing your Social Security retirement benefit is an option if you don't need to use all of it for living expenses. If you are able to invest all or part of your Social Security benefit, receiving early retirement benefits might be advantageous. Not only would you receive more benefit payments, but also you would earn money on those payments when you invest them. The rate of return you would receive would depend upon your investment.
Of course, your rate of return (or inflation-adjusted yield) also depends on how inflation affects your investment. In addition to inflation, you also have to consider how taxes may reduce your yield. As the real rate of return increases, the advantage of taking early retirement benefits increases.
You will receive less per month if you retire early rather than at normal retirement age. This gives you less money to meet your expenses each month, even though your total lifetime benefit may be more than if you waited until normal retirement age to retire. Since some people underestimate how much income they will need when they retire, the reduced benefit may cause them financial hardship.
In general, if you were born after 1928, your benefit is calculated by averaging your 35 highest years of indexed earnings to determine your AIME, then applying a formula to that amount. If you made little or nothing in one or more of those 35 years, waiting to retire until normal retirement age might increase your benefit because each year you wait to retire gives you a chance to earn enough to replace a lower year of earnings in the calculation.
When you're planning your retirement, consider your life expectancy. Although you can't know for sure how long you might live, you can make an educated guess based on your current health, your family's history of longevity, and the average life expectancy for someone your age.
If you die after beginning retirement benefits at normal retirement age, your surviving spouse's benefit at normal retirement age will be 100 percent of your primary insurance amount (PIA). However, if you elect early retirement benefits, then die, the highest benefit your spouse can receive based on your earnings will equal the reduced benefit you were receiving (but not less than 82.5 percent of your PIA). This tradeoff is mitigated somewhat for a working surviving spouse, because at normal retirement age he or she can choose to receive benefits based on his or her own earnings record if that benefit would be greater.
If you retire early (prior to normal retirement age), money you earn after you retire may reduce your Social Security benefit. However, if you wait to retire until your normal retirement age, you can earn as much as you like without reducing your Social Security benefit. This means that if you plan on earning a lot of money after you retire, it might be advantageous for you to retire at normal retirement age rather than earlier.
Social Security retirement benefits received at any age are not taxed if your total income (modified adjusted gross income) plus one half of your Social Security is $32,000 or less if you file a joint tax return or $25,000 or less if you file a single tax return. If your total income plus one half of your Social Security exceeds this amount, then up to 85 percent of your Social Security benefit may be taxed, depending on the circumstances. If you think that your earnings prior to normal retirement age will make your Social Security benefits taxable, you can either try to reduce your earned income or consider retiring later (if doing so would lessen your tax liability).
Although for some people, the financial advantage of electing early will outweigh other concerns, you should carefully consider all aspects of this important decision. Consider the following questions:
You can estimate your retirement benefit online using the Retirement Estimator calculator on the Social Security website (ssa.gov). You can create different scenarios based on current law that will illustrate how different earnings amounts and retirement ages will affect the benefit you receive.
If you are still undecided, take a minute to contact us directly. We can assist in guiding you to create an action plan based on your needs and wishes!