Many people dream of being able to pull off an early retirement. And if you save consistently for many years and invest your assets wisely, you may find that you're able to make a workforce exit at a much younger age than your peers.
But if you're going to leave the labor force early, it's important to know how Social Security might play into your retirement. Here are some key points to keep in mind.
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1. You can't claim benefits until age 62
For some people, early retirement means stopping work at age 63. For others, it means stopping at 55.
Either way, you should know that the youngest age at which you can sign up for Social Security is 62. So if you're retiring ahead of that age, make sure you're comfortable living solely on savings, or a combination of savings and other income sources you may have available.
2. Filing for benefits early will cause a permanent reduction
You're allowed to sign up for Social Security benefits once you reach age 62. But you're not entitled to your complete monthly benefit based on your personal wage history until full retirement age (FRA) arrives. That age is 66, 67, or somewhere in between, depending on your year of birth.
Social Security will reduce your benefits on a permanent basis for each month you file ahead of FRA. If that age is 67, signing up at 62 will mean having to accept a monthly benefit for life that's 30% lower than what it could have been.
3. Claiming Social Security early will result in lower spousal and survivors benefits
You may decide that claiming Social Security early in conjunction with an early retirement is worth it. That way, you'll have more money at your disposal to enjoy your newfound free time while your body is still up for doing the things you want to do.
But while you may be OK with a reduced benefit due to filing for Social Security early, one thing you may not realize is that your actions have the ability to affect your spouse's finances in a negative way.
If your spouse never worked or was a lower earner, they may be looking to claim spousal benefits from Social Security once they're eligible. Spousal benefits max out at 50% of your monthly benefit. But if you slash that sum with an early filing, your spouse will be entitled to less monthly income, too.
If you pass away before your spouse, they'll be entitled to survivors benefits from Social Security. Those will be worth 100% of the benefit you collected each month while you were alive. If you reduce that sum by filing early, you'll leave your spouse with less money to live on in your absence.
It's perfectly possible to pull off an early retirement without Social Security. And just because you're retiring early doesn't mean you're going to file for Social Security before FRA arrives. The point, however, is that it's important to know Social Security's rules, and to understand the implications of retiring early in their context. That way, you can plan accordingly and make smart decisions that benefit you and, if applicable, your life partner.
