How Will Quiting Work Early Affect Your Retirement Plans?
Considerations for Early Retirement
If you are considering early retirement, be sure to fully understand the effect of your decision on these two benefits.
Social Security Benefits
Social Security allows early retirement benefits to begin as early as age 62. The choice to take early retirement benefits can be made any time after age 62 until full retirement age. Full retirement age currently varies based on your year of birth. For those born in 1937 or prior years, full retirement age is 65. For those born in 1960 or later, full retirement age is 67 years old. Those born in years in between should consult the Social Security website for their exact full retirement age.
Social Security benefits are designed to pay each worker the same amount of total retirement payments regardless of when benefits begin. Early retirement benefits are reduced to account for the extra years of payments.
Born in 1959, my full retirement age is 66 years and 10 months. Should I decide to retire at age 62, a $1,000 full retirement monthly benefit would be reduced to $708. That's a $292 reduction, which represents a 29.17% decrease in my Social Security benefits. However, in the 58 months between early retirement and full retirement age, I will have collected $41,064 in benefits. I will need to collect until age 78 before full retirement benefits catch up and surpass my early retirement benefits.
Using information from your personal annual earnings record and Social Security's online calculator, any worker having earned sufficient credits to receive retirement benefits can estimate their retirement benefits for a specific retirement date.
Should you be considering a retirement even earlier than allowed by the Social Security Administration for benefits purposes, use the online calculator to determine how your proposed years of reduced earnings will affect your ultimate Social Security benefit.
Individual Retirement Accounts
If disbursements from an IRA or 401(k) retirement plan are part of your financial plan for early retirement, remember there is a 10% penalty on withdrawals made prior to age 59-1/2. If you're sure early retirement is the right road for you, consult a lawyer to determine if you qualify for an exception from the 10% penalty under IRS Rule 72 T. If you qualify, equal annual distributions can be withdrawn from retirement accounts for five years or until the retiree reaches age 59-1/2, whichever is later without incurring the 10% tax penalty.
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Published by Martha Fry - Featured Contributor in Business & Finance
Martha Fry works as a freelance writer and editor. An accountant who worked at Peat, Marwick & Mitchell and Price Waterhouse, she also does financial consulting and often writes on business and personal fina... View profile
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2 Comments
Post a CommentGreat worl - tough to retire early in the current economic environment.
Sterling work here Martha. I always learn from your articles.