Early retirement may sound appealing, but there could be implications for your Social Security benefits. Your monthly payment may be lower, depending on factors like your age and the number of years you worked. The amount you earn during your career will play a role, too.
To know how early retirement will impact your Social Security benefit, consider the following:
— How to qualify for Social Security.
— How your Social Security benefit is calculated.
— The average Social Security benefit for 2024.
— How to make the most of your Social Security benefit.
How to Qualify for Social Security
To qualify for Social Security benefits, you need to accumulate 40 credits of work. You earn these credits as you work and pay Social Security taxes. Since 1978, it has been possible to earn up to four credits each year. This means that if you work for 10 years, you will typically accrue 40 credits. If you don’t have enough credits, you won’t be eligible to receive benefits.
As of 2024, you can earn one Social Security and Medicare credit for every $1,730 of earnings. You’ll need to earn $6,920 to get the full four tax credits for the year. Earning more than 40 credits over the course of your career will not increase your benefits further. Credits are only used to determine eligibility.
You can apply for Social Security benefits starting at age 62, but your benefit will be lower than if you wait to apply at your full retirement age, which is 66 or 67 for most people. If you retire before the age of 62, you usually won’t be able to receive benefits right away.
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How Your Social Security Benefit Is Calculated
Social Security payouts are calculated by using your average indexed monthly earnings (AIME). This calculation involves adjusting your entire earnings history to account for changes in wage levels and the cost of living over your career. Your 35 highest earning years are averaged to determine your monthly earnings.
Your AIME is then used to calculate your primary insurance amount (PIA), which represents the benefit you would receive if you claim Social Security at your full retirement age.
In 2024, your PIA calculation is determined by adding the following figures:
— 90% of the first $1,174 of your AIME
— 32% of your AIME over $1,174 and through $7,078
— 15% of your AIME over $7,078
If the sum is not already a multiple of 10 cents, round it to the next lower multiple of 10 cents.
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The Average Social Security Benefit in 2024
The average monthly Social Security benefit paid out to retired workers was $1,909.01 in January 2024. If you earned more during your working years and worked at least 35 years, your benefit may be higher.
On the other hand, if you didn’t work for 35 years, or earned a lower wage, your benefit may be less. “If a person has not worked for 35 years, any missing years will be filled in with zeros,” said Chuck Czajka, certified financial fiduciary and founder of Macro Money Concepts in Stuart, Florida, in an email.
[Read: What Is the Maximum Possible Social Security Benefit in 2024?]
How to Make the Most of Your Social Security Benefit
When considering early retirement, review your income and work history. Make sure you’ve worked for at least 35 years and have maximized your earnings during those working years. You may decide to retire early and not apply for Social Security right away. However, this strategy may not align with your retirement savings and budget. “Retiring before your full Social Security age requires a solid foundation to bridge the gap between your desired retirement date and full benefits,” said Gilbert Gallahar, a certified planner and financial planner at Prudential Financial in Gilbert, Arizona, in an email. To pick up the slack, early retirees may be able to take from a 401(k) plan or IRA if they are 59 1/2 or older without having to pay a penalty.
Once you reach your full retirement age, you can apply for benefits to receive the full amount. Or you might decide to wait even longer. After your full retirement age, your benefit will increase by 8% every year until you turn 70. “If you’ve got ongoing sources of income, such as investment income, a part-time job, or a working spouse, it may make sense to push your benefit collection until age 70,” said Christopher Stroup, a certified financial planner for Abacus Wealth Partners in Santa Monica, California, in an email.
Ultimately, you’ll want to determine what’s best for your retirement lifestyle and consider your health and overall happiness as you decide when to apply for Social Security benefits.
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How Early Retirement Will Impact Your Social Security Benefit originally appeared on usnews.com
Update 02/27/24: This story was published at an earlier date and has been updated with new information.
