In the video When Should You Begin Collecting Social Security Benefits, we’ve discussed considerations to take account when determining when to begin collecting social security benefits. Specifically, we discussed the fact that delaying collection allows your benefit amount to grow by 8% per year plus inflation from Full Retirement Age to Age 70 while collecting early an reduce your benefit by as much as 25%.
However, people often have the misconception that retirement and collection of social security benefits must occur at the same time. Actually, when to retire and when to collect are two different decisions. Furthermore, the when to retire decision can also have an impact on the amount of social security benefits you are eligible for even if you delay collection until age 70. Allow us to explain.
First, it is important to understand that your primary insurance amount (the benefit amount you are eligible to collect at Full Retirement Age) is calculated based upon an average of your highest 35 years of income, subject to a cap on the maximum income that is considered each year ($128,700 in 2018). When the social security administration provides an estimate of your benefit on your annual social security statement, they do not use just your past earnings. Instead, they project future earnings by assuming that you will continue earning what you are currently earning until you reach Full Retirement Age. Therefore, if you choose to retire early, your benefit amount may be lower than what is indicated on your statement. Here’s how to know if retiring early will impact your social security benefits.
• If you have 35 years of work history and you earned as much during those 35 years as you are earning now, your benefit amount will not increase by continuing to work. Therefore, retiring early will not affect your social security benefit amount.
• If you have 35 years of work history and you are earning more now than you did during some of those 35 years, your benefit amount is increasing with each year that you continue to work. Therefore, if you retire early, the actual benefit you collect will be less than what is shown on your statement.
• If you have 35 years of work history and you are earning less now than you did during some of those 35 years, your benefit amount is not increasing by continuing to work. Therefore, retiring early will not affect your social security benefit amount.
• If you do not have 35 years of work history, it is assumed you earned $0 for any years less than 35 that you worked. If you retire early, those $0 years are not being replaced with earnings. Therefore, if you retire early, the actual social security benefit you collect will be less than what is shown on your statement.
Social security, in conjunction with your other assets and income sources, will help to support you during your retirement years. Choosing when to retire and when to collect are both big decisions with potentially significant consequences on the quality and longevity of your retirement. Neither should be evaluated independently and both should be incorporated jointly into your overall financial plan.