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Planning for Early Retirement

| September 17, 2018
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The dream of early retirement may become a happy reality on your sixty-second birthday. From that day on, you have the right to start drawing Social Security retirement benefits, assuming you have paid into the system (based on your age) for a minimum number of years. 

Early retirees receive lower monthly Social Security benefits than older retirees, but this may not mean they receive less. What can this mean for you in your retirement planning? 

If you retire between the age of 62 and 65, your full benefit is reduced by five-ninths of 1 percent for each month you receive your benefits before reaching age 65. Therefore, if you retire at age 62, you will receive 80 percent of your primary insurance amount (PIA) each month, while if you retire at age 63 1/2, you will get 90 percent of your PIA. 

On the other hand, by retiring earlier you may get more dollars back from Social Security during your lifetime than if you retire later; you receive benefits for a longer period of time if you retire at age 62 instead of at age 65. To reach the break-even point and recover the three years of benefits you would have received had you retired at age 62, you must receive benefits for about 15 years beyond retiring at age 65. [Note: If you were born after 1938, your normal retirement age will be raised.] 

What happens when you continue working after retirement? If you are under age 65, your benefits are reduced by $1 for every $2 of working income. From ages 65 to 69, you lose $1 of Social Security benefits for every $3 of employment income until you reach age 70, after which you can collect full Social Security retirement benefits regardless of how much you earn. 

The best strategy is to coordinate all of your existing benefits with potential Social Security benefits. Then you can choose which provides the best long-term financial reward. 

For additional information or an estimate of your Social Security benefits, you can call the Social Security Administration at 1-800-772-1213. 

If early retirement seems a reasonable goal, figure how much income you can count on in addition to Social Security from investments, savings, a company retirement plan, IRA, or annuity. Pension benefits are often tied to Social Security benefit amounts, so check carefully on the possible effects of early retirement. Then add up your current living expenses and make a rough estimate of how much income you would need after retiring. 

A critical point is whether quitting your job would leave you without health insurance and other benefits such as dental of legal. If so, find out how much you would have to pay for private coverage or membership in a prepaid health care plan until you are age 65. You normally cannot enroll in Medicare before then, and adequate protection is not inexpensive. (It is absolutely essential that you have health insurance; otherwise a serious illness or injury could easily cripple you financially.) 

Various studies have found that retirees can get by on roughly two-thirds of their pre-retirement income, depending on their lifestyle, without lowering their standards. Among other things, they generally pay less taxes, need less clothing, entertain less, and do little or no commuting to a job. 

If you find that your total retirement income would not be enough, you might explore the possibility of part-time employment (within allowable Social Security limits to avoid benefit reduction), buying a less expensive home or moving to an area with a lower cost of living. If you have any doubts about being able to make ends meet, keep working a while longer. In addition, many health experts encourage some form of employment during retirement. The challenge of work may help fill the many non-recreational hours available to retired individuals. Whatever you choose, remember to minimize the stress and maximize the fun of retirement.

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