Early Retirement and Its Impact on Social Security Benefits: A Comprehensive Guide
Introduction
Deciding to retire early can have significant implications for your Social Security benefits. Understanding how these decisions impact not only your personal benefit but also those of your spouse is crucial. This guide delves into the complexities of early retirement and its impact on Social Security benefits, including the reduction in benefits, how it affects a spouse, and factors to consider such as the cost of living adjustment.
Reduction in Social Security Benefits
When an individual chooses to retire early, their Social Security benefits will be permanently reduced. This figure is not fixed but rather calculated based on the number of months you file for benefits before reaching your full retirement age (FRA).
Permanent Reduction in Benefits
Retiring at 62 will result in a permanent reduction of your monthly Social Security benefit under the current rules. For every month you claim Social Security benefits before reaching FRA, your benefit is reduced by 0.58%. This means for each year, the reduction is about 7%. For instance, if you retire at 62 instead of 67, your benefit will be reduced by 24% (36 months × 0.58%).
Spousal Benefits Under Early Retirement
The impact on spousal benefits is also significant if you file for Social Security benefits early. Your spouse's benefits will also be reduced by the same percentage, assuming they are relying on spousal benefits. Yet, there is a silver lining. If your spouse's earnings from working over the years are higher than the reduced spousal benefit you provide, they will receive the higher amount.
Example:
My wife started her benefits at age 62 and has a 30% reduction in her benefits, which is permanent. I started my benefits at Full Retirement Age (67) with no penalty. Since she did not work while raising our child, her spousal benefit is calculated based on a smaller income record. However, once eligible, she can receive half of my benefit, minus the permanent reduction. If she is the surviving spouse, she would receive my full benefit.
Impact on Benefits if You and Your Spouse Delay Retirement
Deciding to delay your retirement can have a positive impact on the amount of Social Security benefits you and your spouse receive. Delaying past your full retirement age until age 70 can significantly increase your benefit amount.
Delayed Retirement and Higher Benefits
If you and your spouse delay your retirement, keeping your earnings active, you and your spouse may qualify for higher benefits. Delaying until age 70 can increase your primary insurance amount (PIA) by up to 32% over the amount you would receive at your FRA.
Example
For instance, if you have a FRA monthly benefit of $1000, delaying until age 70 can boost that to $1320. This increase applies to both individuals, meaning if one spouse waits until age 70, their benefit amount will be higher, potentially influencing the spousal benefit as well.
Survivor Benefits and Early Retirement
Survivor benefits, which are based on the amount the principal earner was receiving at the time of their death, will also be affected by if the principal earner filed early or at FRA.
Permanent Impact on Survivor Benefits
Filing for Social Security benefits early will reduce the amount a widow or widower can receive in survivor benefits. Since survivor benefits are based on the principal earner's reduced benefit amount, it is essential to consider how early filing may impact the survivor's benefits.
Annual Cost-of-Living Adjustment (COLA)
Finally, it is important to consider the impact of early retirement on the annual cost-of-living adjustment (COLA). COLA is used to increase your Social Security benefits to account for inflation. However, if you begin claiming at 62, your COLA will be based on your reduced benefit amount. This means that even if COLA increases, your adjusted benefit will not rise as much as it would have if you had waited until FRA.
Example
If the annual COLA is 3%, at FRA, your benefit will adjust to $1030. However, if you file at 62, your reduced benefit (70% of $1000, or $700) will only adjust to $721 when including the COLA. This continues to create a gap between the full-adjusted benefit and the reduced-adjusted benefit each year.
Conclusion
Deciding to retire early can significantly impact your Social Security benefits and the benefits of your spouse. Understanding the lasting effects of early retirement, including the reduction in benefits, the impact on spousal benefits, and the annual COLA, is essential.