It's easy to see the benefits of retiring early -- more time for family and hobbies and less stress from a job, to name a few. But leaving the workforce in your 50s or earlier has drawbacks, too. You'll have to save more to cover more years of expenses, and you might have less help from Social Security than you think.
There's a little-known Social Security rule that could shrink your checks if you retire too early. Here's what you need to know about it and how it might affect your benefits.
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How the government calculates your Social Security benefit
The Social Security Administration bases your benefit on your income during your working years. More money earned means more Social Security taxes paid, and that leads to a larger benefit in retirement.
Your benefit is always based on your 35 highest-earning years, adjusted for inflation. If you've worked more than 35 years, your lowest-earning years aren't included in your benefit calculation. Many find that working longer actually increases their Social Security checks over time since they earn more later in their career than they did starting out.
The news isn't as great if you've worked less than 35 years because you'll have zero-income years factored into your benefit calculation. Even one of these reduces your monthly Social Security benefit by several dollars.
For example, if you earned $50,000 per year, adjusted for inflation, for 35 years, your Social Security benefit would be $2,014 per month at your full retirement age (FRA), based on the current formula. But if you'd only worked for 34 years, you'd have one zero-income year included in your benefit calculation. This would drop your monthly checks to $1,976 -- a $38 difference. That's more than $450 less per year, and it could add up to thousands of dollars lost throughout your retirement.
What you can do
It's possible that you could still squeeze in 35 years of work history and retire a little earlier than normal. In this case, you wouldn't have to worry about zero-income years in your benefit calculation. But if you have some lower-income years from earlier in your career, you'll probably wind up with less than you'd get if you worked until you were in your 60s or beyond.
It's a bit more concerning if you're retiring before you've logged your 35th year in the workforce. Every zero-income year takes a toll, and you'll have to compensate for these smaller benefits by saving more money for retirement on your own. If you're comfortable with that, then there's no issue. But if not, you may want to rethink your retirement timeline.
Waiting to retire until you've spent 35 years in the workforce will prevent zero-income years from shrinking your Social Security benefits. Or if that seems too long, you could wait just a year or two.
You could also opt to grow your checks by timing your Social Security claim well instead. For most people, delaying benefits is the way to go. Every month you wait to sign up increases your checks slightly until you qualify for your maximum benefit at 70. However, to do this, you'll have to cover all your retirement expenses on your own in the meantime. And that may not make sense for you if you're in a tough financial spot or your health is failing.
Only you can decide when you feel comfortable retiring and claiming Social Security. But it doesn't hurt to explore a few options before making your decision. Understanding the implications of your choice will help you avoid unpleasant surprises when you finally leave the workforce.
