Early retirement has its advantages, such as more time for hobbies and family, but understanding the financial implications is crucial.
Nearly 25% of individuals opt to start receiving their Social Security retirement benefits as early as age 62, according to the latest data from the Social Security Administration (SSA)
The Social Security Administration (SSA) calculates retirement benefits based on the 35 highest-earning years of an individual’s career. Utilizing the Social Security Administration (SSA) website, individuals can estimate their benefits using a quick calculator or a more detailed online tool requiring earnings history. On average, those retiring at age 62 receive around $1,275 per month, with men averaging $1,421 and women $1,141. Recent adjustments, including an 8.7% cost-of-living adjustment (COLA) in 2023 and an anticipated 3.2% COLA in 2024, are expected to increase these averages.
However, opting for early retirement comes with trade-offs. The Social Security Administration (SSA) reduces benefits by five-ninths of 1% for each month before full retirement age (FRA) for up to 36 months. Before that, an additional five-twelfths of 1% reduction applies. Early retirement at 62 results in a 30% reduction in monthly benefits. Alternatively, delaying benefits until age 70 increases the monthly benefit by 8% per year for up to three years.
It’s essential to note that the Social Security Administration (SSA) deducts $1 from benefits for every $2 earned above an earnings limit ($22,320 in 2024)
This decreases to $1 for every $3 earned above a higher limit ($59,520 in 2024) in the year of reaching FRA. Two often-overlooked costs of early retirement include the potential impact on the 35 highest-earning years calculation and health insurance. Continuing to work after 62 could increase lifetime earnings, potentially affecting benefits. Moreover, retiring at 65 makes individuals eligible for Medicare, preventing the need to fully self-fund health insurance.
Understanding these considerations is crucial for making informed decisions about when to start collecting Social Security benefits. While early retirement offers lifestyle advantages, individuals must weigh these against potential reductions in benefits and additional costs to make the most informed choices for their financial well-being.