Just How Big a Social Security Hit Will Early Retirees Take?

Retiring early can seem attractive, since you’ll be out of the workforce and enjoying your freedom sooner.

Unfortunately, there are some potential financial consequences of quitting work at a young age. For many early retirees, one of the biggest comes as a result of claiming Social Security benefits early.

Now, you aren’t required to claim these benefits as soon as you retire — but many seniors do because they can’t afford to live without a paycheck otherwise. Unfortunately, an early Social Security claim can end up reducing monthly benefits for life.

Image source: Getty Images.

Understanding the serious consequences of an early Social Security claim

There are two different ways that claiming Social Security early can impact the money you receive from your retirement benefits:

Your standard benefit is reduced by early filing penalties if you’ve claimed benefits prior to your designated full retirement age (FRA). Benefits can be claimed as soon as 62, but FRA is between 66 and four months and 67, depending on birth year.
You will forfeit the chance to earn delayed retirement credits, which increase the standard benefit you’d be eligible for at full retirement age if you waited beyond FRA to get your first check. These credits can be earned until age 70.

Your standard benefit equals a percent of what you earned over your career. It’s calculated by adjusting your income during the years you worked to account for wage growth and then figuring out your average wages in the 35 years your earnings were highest.

The early filing penalties or delayed retirement credits that apply can reduce this standard benefit by as much as 30% or raise it by as much as 24%, so the consequences of your claiming choice can be profound.

How much will your benefit be affected?

To get a clearer picture of just how much your Social Security checks are impacted by your benefits claiming choice, this table shows how early filing penalties or delayed retirement credits affect your monthly income if your full retirement age is 67 and you would’ve received a standard benefit of $1,657 at FRA.

Social Security Claiming Age

Benefits Reduction/Increase Compared to Standard Benefit

Monthly Benefit Amount

62

30% reduction

$1,160

63

25% reduction

$1,243

64

20% reduction

$1,326

65

13.3% reduction

$1,437

66

6.7% reduction

$1,546

67

None

$1,657

68

8% increase

$1,790

69

16% increase

$1,922

70

24% increase

$2,055

Data source: Chart by author.

As you can see, retiring and claiming Social Security any time before the age of 70 will significantly reduce the monthly checks you get. And the earlier you retire, the bigger the hit. Early retirement happens well before 70, so you’ll see much smaller checks if you leave the workforce while you’re young and claim Social Security benefits in order to do it.

Does this mean retiring early should be off the table?

While a big reduction in monthly Social Security benefits can leave you with much less guaranteed income in your later years, that doesn’t mean you should never retire early.

You can opt to save more and live off your investment portfolio for several years before starting your benefits if you want to leave the workforce at a young age but not take a big hit to your Social Security retirement income. Or you might decide an early claim is worth the price you pay if it’s necessary to stop working sooner.

Just make sure that before you decide, you understand that early retirement can come at a steep price as far as the Social Security income you’ll get each month over the course of your lifetime.

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