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Here's How Much Money You Might Lose If You're Forced to Claim Social Security Early

By Maurie Backman – Jun 27, 2020 at 9:06AM

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Filing for Social Security early could have serious financial consequences.

It's one thing to choose to retire early and leave the labor force at a time that works for you. But it's another thing to be forced into early retirement against your will.

Unfortunately, an estimated 48% of workers ultimately land in the latter scenario, according to the Employee Benefit Research Institute. And that could have a host of implications.

For one thing, retiring early means getting fewer years to save in your 401(k) or IRA. It also means needing to tap that account sooner than planned, thereby increasing your risk of depleting your cash reserves in your lifetime.

Older man at table holding document and looking upset

Image source: Getty Images.

But retiring early could also force a scenario where you're forced to claim Social Security early. And that could cost you a world of income during your senior years.

The financial impact of claiming Social Security early

Your Social Security benefits are calculated based on the wages you earn during your 35 highest-paid years on the job. From there, you're entitled to your full monthly benefit based on your wage history once you reach full retirement age, or FRA.

FRA isn't the same for everyone -- it depends on your year of birth, as follows:

Year of Birth

Full Retirement Age

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 or later

67

Data source: Social Security Administration. 

You're allowed to claim Social Security ahead of FRA if waiting that long isn't desirable or if, in the case of a forced early retirement, waiting just doesn't work out. The earliest age you can sign up to receive benefits is 62, but for each month you file ahead of FRA, your benefits will be reduced. And unless you manage to undo your filing within a year and repay all of the money in benefits you received, that reduction will remain in effect for the rest of your life.

Here's what that reduction will look like, depending on how early you're forced to file for benefits:

Claim Benefits at This Age With an FRA of 67

And Your Benefits Will Be Reduced by This Percentage

66

6.67%

65

13.34%

64

20%

63

25%

62

30%

Table by author.

The average senior on Social Security today collects about $1,500 a month. If we go with that figure, here's the income hit you might take if you're forced to file for Social Security sooner than you'd like:

Claim Your $1,500 Benefit This Many Years Early

And Here's What You'll Get Instead

1 year early

$1,400

2 years early

$1,300

3 years early

$1,200

4 years early

$1,125

5 years early

$1,050

Table by author.

Clearly, you stand to give up a lot of recurring income if you land in a scenario where you have to claim Social Security before reaching FRA, which is why it pays to avoid being backed into that particular wall. But how do you do that when circumstances outside your control could force you into early retirement?

For one thing, you can aim to pad your retirement savings earlier in life so that if your working years are cut short, you'll still have a decent balance to draw against. Imagine your goal is to claim Social Security at 67, but you're laid off at 63. If you have a solid amount of savings, you can live off your nest egg while leaving your Social Security benefits alone to avoid a lifelong hit.

Another option? Have a backup plan for cutting expenses in a meaningful way. That could involve relocating to a cheaper corner of the country, downsizing your home, or converting part of your home to a rental unit so you can collect regular income from a tenant. There are different options you can play around with, but the key is to have some idea of what you might do should a forced early retirement become your reality.

Preserve those benefits

Social Security could end up being your most substantial income source throughout retirement, so it pays to do everything in your power to avoid slashing your benefits. Though you may not be able to prevent being forced into early retirement, if you plan accordingly, you might manage to leave those benefits alone until FRA if that scenario comes to be.

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