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An early retirement can limit your Social Security benefits. Here’s why | Personal finance

An early retirement can limit your Social Security benefits.  Here's why |  Personal finance

(Maurie Backman)

Some people love their work and want to continue working as long as they are physically able. But you may be in the opposite camp. Maybe you don’t like your job and find it stressful. Or, maybe your job is just fine, but you’d rather retire as early as possible so you can reclaim your days and do the things you’ve always wanted to do.

There are many benefits that you can enjoy if you end up retiring early. But from a Social Security standpoint, early retirement can hurt you.

Look at the big picture

The less time you spend in the workforce, the less opportunity you will have to contribute money to your nest egg. And also, the sooner you retire, the sooner you may have to tap into your savings, increasing the risk of running out of money in your lifetime.

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All of this may be pretty obvious. But what’s less obvious is the way an early retirement can affect your Social Security benefits.

The monthly benefit you’re entitled to from Social Security is based on your personal wage history – specifically your 35 highest-paid years on the job. But if early retirement means you don’t put in a full 35 years in the workforce, your monthly benefit could take a serious hit, because you’ll have a $0 factored into that equation for every year you go without a income.

Now let’s say you started working at the age of 25 and you recently turned 60. You can assume at that point that early retirement won’t affect your Social Security benefits since you’ve put in a full 35 years on the job. .

But early retirement can still leave you with a lower benefit in that scenario. The reason? Many people end up making much more money at the end of their career than at the beginning or middle. And if you stop working at a time when your income has peaked, you may end up with a lower monthly benefit as a result.

Imagine that at age 60 you are making $120,000 a year at your job, but earlier in your career you had a few years where you only brought in a $30,000 salary. Granted, Social Security adjusts earlier-in-life wages for inflation. But still, there is a big difference between $120,000 and $30,000.

However, if you were to continue working until, say, age 65 at your $120,000 salary, you would have the chance to replace several years of a $30,000 income with an income four times that amount. The result? A higher benefit throughout your retirement.

Think twice before retiring early

While early retirement can be a wonderful thing, it also has its share of pitfalls. And one of those could include a lower monthly Social Security benefit for life. That’s why it’s important to consider both the pros and cons of early retirement before you officially leave the workforce. You may decide that it’s worth putting away for a few more years if it gives you a more comfortable income for the rest of your life.

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