How Retiring Early Affects Social Security Benefits

By Dr. Don Taylor, Ph.D., CFA, CFP,

Dear Retirement Adviser,

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I'm 56 and thinking of retiring at 59. For about the last 10 years, I have earned more than the $106,800 income ceiling when Social Security contributions stop. By age 59, I will have contributed for 35 years. My question is, during the time from age 59 to 62 (or age 66 for that matter), will my monthly Social Security payout drop drastically because I'm not contributing? Is this a good reason to take the Social Security money at age 62?


-- Joe Junction

Dear Joe, If you're currently 56, you were most likely born in 1956. That means your full retirement age is 66 and 4 months. If you file for retirement benefits at age 62, your retirement benefits are reduced by 26.67% versus filing for retirement benefits at your full retirement age.

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The Social Security Administration uses the highest 35 years of indexed earnings in its benefit computation after you turned 21. The maximum taxable earnings ceiling you mention rose to $113,700 in 2013. Your earnings are indexed based on a national average wage index. For workers with a work history of more than 35 years, it's typically the early years that are dropped from the computation, even though those earnings are indexed.

Your letter reads like you expect to be ahead of the game by filing for benefits at age 62 because there are fewer years of zero earnings in your benefit calculation. Since you don't expect any years of zero earnings to be included in your benefit calculation at age 62, there won't be any at your full retirement age. That's because you'll have 35 years of nonzero annual wages post age 21.

You can view your Social Security statement online to verify your earnings record. From there you can use Social Security's Retirement Estimator calculator to run some what-if scenarios based on your planned early retirement at age 59.

I don't know enough about your retirement savings and retirement income other than Social Security to recommend whether you should file for retirement benefits at age 62. Barring any health issues, and especially if you're married, I'd suggest trying to delay filing for benefits until at least your full retirement age if you can swing it financially.

Thanks to Edward Lafferty, a public affairs specialist at the Social Security Administration, for helping me with this reply.

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