An Early Retirement Might Slash Your Social Security Benefits. Here’s Why

Some people love their jobs and want to keep working as long as they’re physically able. But you may be in the opposite camp. Maybe you don’t like your job and find it stressful. Or, maybe your job is just fine, but you’d rather retire as early as possible so you can reclaim your days and do the things you’ve always wanted to do.

There are many benefits you might enjoy if you end up retiring early. But from a Social Security standpoint, early retirement could hurt you.

Look at the big picture

The less time you spend in the workforce, the less opportunity you’ll have to contribute money to your nest egg. And also, the sooner you retire, the sooner you might have to start tapping your savings, thereby increasing the risk of your money running out in your lifetime.

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All of that may be pretty obvious. But what’s less obvious is the way an early retirement might affect your Social Security benefits.

The monthly benefit you’re entitled to from Social Security is based on your personal wage history — specifically, your 35 highest-paid years on the job. But if retiring early makes it so you don’t put in a full 35 years in the workforce, then your monthly benefit could take a serious hit, because you’ll have a $0 factored into that equation for every year you’re without an income.

Now, let’s say you started working at age 25 and you recently turned 60. You might, at that point, assume that retiring early won’t affect your Social Security benefits, since you’ll have put in a full 35 years on the job.

But early retirement could still leave you with a lower benefit in that scenario. The reason? Many people end up earning a lot more money at the end of their careers than at the beginning or middle. And if you stop working at a time when your income has peaked, you might end up with a lower monthly benefit as a result.

Imagine that come age 60, you’re earning $120,000 a year at your job, but earlier on in your career, you had several years where you only brought in a $30,000 salary. Granted, Social Security does adjust earlier-in-life wages for inflation. But still, there’s a big difference between $120,000 and $30,000.

However, if you were to keep working until, say, age 65 at your $120,000 salary, you’d have the chance to replace several years of a $30,000 income with an income that’s four times as large. The result? A higher benefit throughout your retirement.

Think twice before you retire early

While early retirement can be a wonderful thing, it also has its share of pitfalls. And one of those could be locking in a lower monthly Social Security benefit for life. That’s why it’s important to consider both the pros and cons of retiring early before making your workforce exit official. You may decide that plugging away for a few more years is worth it if it sets you up with a more comfortable income for the rest of your life.

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