Many people strive for early retirement – despite the fact that it can present numerous difficulties. For one thing, leaving the workforce at a young age may restrict the growth potential of your IRA or 401(k). Additionally, it may mean determining your health coverage options if you are not yet eligible for Medicare.
However, there is a less obvious disadvantage to early retirement that many seniors overlook until it is too late. And it may leave you with significantly less income for the rest of your life.
Will early retirement result in a reduction in Social Security benefits?
The monthly Social Security benefit to which you are entitled in retirement is determined by your earnings during your 35 years of peak employment. However, if you do not work the full 35 years, your personal benefit calculation will include a zero for each year you do not have an income on file.
As an example, suppose you retire early enough that you only have a 30-year work history. This could result in a less generous Social Security benefit than you desire.
Now bear in mind that Social Security is designed to provide you with a monthly benefit for the rest of your life. In comparison to your savings, which you may deplete over the course of your lifetime, you never have to worry about your Social Security benefits running out. Thus, locking in a lower monthly benefit is a risky move that could result in a lifetime of financial stress.
Consider a career change prior to retirement.
Some people retire early because they’re burned out at work and can’t bear the prospect of working another five to ten years or longer in a miserable job. If this is the primary reason for your early retirement, there may be a better solution — changing careers.
If you switch to a less stressful field, you may find that you no longer despise your job as much. And even if you are forced to take a pay cut, having some money coming in for a few additional years is preferable to having none at all. This way, you can avoid depleting your savings early and increase your Social Security benefit calculation by a few years.
Another possibility is to reduce your hours to part-time work. While you may enjoy your work, it is extremely demanding by nature. If you’re in your late 50s or early 60s and despise the prospect of working 50+ hour weeks, consider switching to part-time work. This way, you’ll maintain a record of income, which may be beneficial for Social Security purposes.
Consider all of your options carefully.
Many people are able to retire early after 35 years of service. However, if this is not your situation, exercise extreme caution when leaving the workforce at a young age. This could result in a reduced Social Security benefit – and increased financial stress later in life.