How Early Retirement Impacts Your Social Security Check

Thinking about retiring before you start collecting Social Security? Doing so won’t reduce the benefit that you accrued before you stopped working—but it could produce a smaller benefit than your estimated benefits statement suggests.

You should receive an estimated-benefits statement from the Social Security Administration each year. The benefits it projects assume that you continue working to the retirement ages listed (62, 66 and 70) at your current salary. For example, your statement might say something like, “If you continue working until your full retirement age (66 years), your payment will be X.”

But, what if you’re not working, and don’t plan to work again before applying for Social Security benefits? Will you receive the benefit your estimated benefits statement shows, or will be reduced?

To answer that question, you have to understand how Social Security benefits are calculated. They’re based on earnings over your entire career, with income from past years adjusted for inflation. When calculating your benefits, the Social Security Administration looks at the 35 years with the highest adjusted wages. If you have more than 35 years of earnings, your lowest earning years are dropped. If you have fewer than 35 years of earnings, one or more of the figures used in the calculation will be zero.

Now, to determine future earnings, Social Security looks at your last two years of income. The problem is, if your statement is prepared in the first six to nine months of the year, your earnings for the previous year won’t be included, so the Social Security Administrator will use uses your earnings from the year before as your earnings for last year, this year and future years.

So, in essence, retiring before you start collecting Social Security won’t reduce the benefit that you accrued before you stopped working—but it could produce a smaller benefit than your estimated-benefits statement suggests.

To get a more precise prediction of future payments based on your recent past, you can request an updated statement from Social Security by filling out a form on the agency’s Web site.

We can also help you obtain an instant calculation of estimated future payments; contact us now.

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