Here’s the real impact of retiring early on your Social Security

Many Americans are relying on their Social Security benefits to carry them through their golden years — even if they decide to retire early. If you’re born in 1960 or later, you’ll have to wait until you turn 67 to collect your full benefits, though you can start collecting as early as age 62 (though your monthly check will be reduced accordingly). But many Americans are looking to retire early — and much earlier than 62. More Americans in their 40s and 50s are seeking a life of freedom, away from the 9-5 grind and cubicle walls. But will that actually give you financial freedom? If you’re planning to rely, at least partially, on your Social Security benefits in your golden years, it’s important to understand how Social Security benefits are calculated—and how that will impact your monthly check in the future.

Calculating your Social Security benefit

The average monthly Social Security benefit for a retired worker is $1,909 (as of January 2024). But that number could be much less if you don’t work and contribute to the plan for a full 35 years. The amount of your benefit is determined by calculating the average indexed monthly earnings (AIME) from the 35 highest-earning years of your working life, which is adjusted for the cost of living. If you don’t work the full 35 years, the Social Security Administration (SSA) fills in those gaps with $0 for each year missing. So, if you only work 25 years, your 35 highest-earning years would include 10 years of $0 in earned wages, bringing down your overall average. Basically, your AIME can be used to determine your primary insurance amount (PIA), which would be the amount you receive if you claim your benefit at full retirement age. You can calculate your PIA by adding:

• 90% of the first $1,174 of your AIME
• 32% of your AIME from $1,174 to $7,078
• 15% of your AIME over $7,078

To estimate your benefit, the SSA has a number of handy tools on its website, which can help you understand the impact of working fewer than 35 years. Ultimately, if you retire early, you’ll reduce your monthly benefit. And, if you claim your benefits before your full retirement age (around age 67), you’ll reduce your benefits by about 0.5% on average each month, further reducing that monthly check.

Other considerations for early retirement

Medical expenses: If you’re in your 30s, 40s or 50s and in good health, consider that retiring early will leave you without employer-provided medical insurance. And you won’t be eligible for Medicare until age 65. That means you’d have to pay for private medical insurance or pay for medical expenses out-of-pocket, which can quickly add up. Compounding interest: You’ll also miss out on the benefits of compounding interest if you’re not saving for retirement in your 30s, 40s or 50s. It’s not just how much you’d contribute during that time, but how much interest you’d be earning on the interest that has compounded over decades. Unexpected expenses: If you have any unexpected expenses (like medical care), you might have to dip into your nest egg early. While that reduces your overall retirement savings, you’ll also have to pay an early withdrawal penalty from tax-deferred accounts, such as 401(k)s and traditional IRAs. Plus, any withdrawal counts as income, so you’ll also have to pay income tax on it. On the flip side, if you find yourself a bit bored in early retirement, you may end up taking on some gig work or starting a side hustle. In that case, you’ll need to report your income and pay taxes, which in turn would boost your Social Security benefits — and could help you retire more comfortably in the long run.