Some people love their job and want to keep working as long as they are physically able. But you may be in the opposite camp. You may not like your job and find it stressful. Or maybe your job is fine, but you’d rather retire as early as possible so you can reclaim your days and do the things you’ve always wanted to do.
There are many benefits you can enjoy when you retire early. But from a Social Security standpoint, early retirement can hurt you.
Look at the big picture
The less time you spend at work, the less likely you are to contribute money to your nest egg. And also, the sooner you retire, the sooner you may need to start tapping into your savings, increasing the risk of running out of money during your lifetime.
That can all be pretty obvious. But what’s less obvious is how early retirement can affect your Social Security benefits.
The monthly benefit you’re entitled to from Social Security is based on your personal pay history — specifically your 35 highest-paying years on the job. But if early retirement keeps you from working the full 35 years, then your monthly benefit could take a serious hit because you get a $0 in that equation for every year you have no income.
Let’s say you started working at age 25 and recently turned 60. You can assume at that point that early retirement will not affect your Social Security benefits, as you have been employed for 35 years. .
However, in the event of early retirement, you can still receive a lower benefit in that scenario. The reason? Many people end up making much more money at the end of their careers than at the beginning or in the middle. And if you stop working at a time when your income has reached a peak, you may receive a lower monthly benefit as a result.
Imagine that at age 60 you were making $120,000 a year from your job, but earlier in your career you had several years where you brought in only $30,000 in salary. Granted, Social Security adjusts wages earlier in life for inflation. But still, there is a big difference between $120,000 and $30,000.
However, if you continued working until, say, age 65 with your salary of $120,000, you would have the chance to replace several years of a $30,000 income with an income four times that. The result? A higher benefit during your retirement.
Think twice before retiring early
Early retirement can be a wonderful thing, but it also has its pitfalls. And one of those could be a lifetime lower social security benefit. That’s why it’s important to consider both the pros and cons of early retirement before making your workforce official. You might decide it’s worth quitting for a few more years if it gives you a more comfortable income for the rest of your life.