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How Can Early and Late Retirement Affect Social Security Payouts?

Most retirees give little thought to Social Security. After all, the thinking goes, Social Security won’t fully cover expenses in retirement, and it might not even be around. But Social Security is also a great safety net. It can supplement what you’ve saved, help you avoid running out of money, or help you pay down any lingering debt.

Retiring both early and late can affect how much you get in Social Security. This might seem unfair, but it actually makes good sense. The government doesn’t want to spend extra money funding early retirees, and it also wants to incentivize people who spend less time on Social Security. This money-saving strategy can directly affect your monthly Social Security check. Here’s what you need to know.

You can collect Social Security beginning as young as 62, but you’ll earn more if you retire at full retirement age—a figure that varies depending upon when you were born.

Retiring Early Can Lower Social Security Payout

If you retire early, the extent to which Social Security is reduced depends on how early you retire. Up to 36 months of early retirement, your benefit is reduced 5/9 of a percent for each month before full retirement age. If you retire more than 36 months before full retirement age, then for each additional month above 36 months, the benefit is reduced an additional 5/12 of one percent.

Retiring Late

If you retire late, you’ll be eligible for a delayed retirement credit. The Social Security Administration uses a complex algorithm based on year of birth and how late you retire to determine your eligibility for a delayed retirement credit. The credit ranges from 3-8% per year, so talk to a financial advisor to determine exactly how much you’ll be eligible for.

Considerations for Early Retirees

In addition to costing you Social Security benefits, retiring early also shortens the amount of time you have to save for retirement. You never know what will happen in retirement, so you should only consider early retirement if you know you have enough money for whatever life throws your way.

If you’re retiring for medical reasons, don’t forget to look into Medicare options. You should also know that your home may be a way to fund some of your retirement expenses, and to compensate for the early retirement penalty. If you’re over 62 and own your home, a reverse mortgage offers access to additional money that you can spend as you see fit. You don’t have to repay the loan as long as you remain in your home. So if making ends meet is a real concern, don’t sell your home. Consider using it as a source of income.

Considerations for Late Retirees

Retiring late is probably the healthiest long-term financial strategy, for several reasons:

  • It allows you to maintain working relationships with people who can connect you to part-time or consulting work if you need that work down the road. The longer you work, the longer your networking connections last.
  • It offers you several more years to earn and save money.
  • It means you’ll be dependent on your savings or Social Security for fewer years.

If you’re in poor health, though, retiring late could actually cost you money by causing your health to decline more rapidly, thereby necessitating more health care expenses and causing more stress.

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