How Does Early Retirement Affect Social Security?

Social Security is a national social insurance program created in 1935 to supplement the income of retirees, and knowing how early retirement affects this program is important for those nearing retirement age. The program is designed to replace roughly 40 percent of the average retiree’s pre-retirement wage income, though this rate will vary from individual to individual, according to standard limits and adjustments. Benefits payments are made to all persons who have accumulated 40 Social Security “credits.” Only four credits can be accumulated in any given year, and, in 2011, a single credit is granted for each $1,120 in earnings from work.

Full Retirement Age

Full retirement benefits are paid to those individuals that reach full retirement age, as defined by the Social Security Administration. As of 2011, full retirement age varies between 66 and 67 years of age, depending upon when the beneficiary was born. Beneficiaries born in 1954, or before, reach full retirement age at 66. For each year after 1954, the full retirement age increases two months until it reaches 67 for those persons born in 1960 or later.

Early Retirement

An individual may choose to begin receiving Social Security benefit payments at age 62, assuming he or she has met all general Social Security requirements. However, early retirement will result in the reduction of the monthly benefit amount over the full course of the individual’s retirement. The reduction formula is relatively easy to calculate. For each month of early retirement up to 36 months, an individual’s benefit amount is reduced 5/9 of 1%. For each month beyond 36 months of early retirement, an individual’s benefit amount is further reduced by 5/12 of 1%.

For example, a person who chooses to retire exactly 36 months before his or her full retirement date would find his or her benefit amount reduced by 20 percent (36 * 5/9%) over the full course of his or her retirement. One more month of early retirement would further reduce the benefit amount by just fewer than one-half of one percent (5/12%).