If you’re contemplating early retirement, your decision about Social Security is critical. You’ll need to weigh when to claim benefits and how this choice may impact your retirement income. Before proceeding with early retirement, there are three crucial facts about Social Security benefits that will help guide your decision.

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Fact 1: Claiming Benefits Early Reduces Payout

Deliberation is key, as claiming Social Security benefits immediately upon retirement is not mandatory. Waiting, if financially feasible, could be advantageous. The earliest age for claiming Social Security benefits is 62, prior to your designated full retirement age, which typically ranges from 66 to 67 depending on your birth year. This age determines eligibility for your standard Social Security benefit, known as your primary insurance amount (PIA). Claiming before reaching full retirement age diminishes your benefit in relation to your PIA. For example, with a full retirement age of 67, claiming at 62 could result in a 30% smaller benefit than the standard payout. By claiming early, you forgo opportunities to accumulate delayed retirement credits that enhance your benefits beyond the standard payout, though these credits peak at age 70. Opting to reduce your Social Security benefit by claiming early should not be taken lightly, as the options to reverse this decision are limited. If you aim to postpone your claim despite an early retirement, robust savings are essential to sustain you.

Fact 2: Incomplete Work History Could Further Decrease Benefits

Prior to early retirement, consider the impact on your Social Security income due to an incomplete work history. Your benefit is calculated based on your average, inflation-adjusted wages over the 35 years with the highest earnings. Should you retire early with less than 35 years of work, years of $0 wages will factor into the benefits formula, leading to reduced checks. Even working precisely 35 years could diminish your Social Security income, as each year of the 35 in the workforce is included in the benefits calculation. Given that income typically rises with age, early retirement means relinquishing potential increased benefits by replacing low-earning years early in your career with the higher salary typically earned before retirement.

Fact 3: Returning to Work Can Affect Benefits

Another factor to contemplate before early retirement and claiming Social Security is the potential consequence of changing your mind. If you start collecting retirement benefits and then reenter the workforce, there’s a threshold on potential earnings before the Social Security Administration withholds benefits. If you will reach full retirement age during the year, you can earn up to $59,520. Beyond that, benefits decrease by $1 for every $3 earned. If you won’t reach full retirement age during the year, you can only earn up to $22,320 before benefits decrease by $1 for every $2 earned. At full retirement age, the Social Security Administration will adjust your benefits to account for the withheld income. Nevertheless, initially losing a portion of your benefits might have financial implications if you planned on combining your job and Social Security income to cover expenses. This concern no longer applies after reaching full retirement age, when you can work without affecting benefits. It is, however, a crucial consideration if you intend to claim Social Security early and are uncertain about returning to work.

Before tendering your resignation and proceeding with early retirement, carefully consider these three Social Security rules to ensure that your decisions align with your long-term financial goals.

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