5 Factors for Deciding Whether to Retire Early

Dear Deborah,

I am 61 and I’d like to retire and begin taking Social Security benefits next year. But I’m not sure if I should take early retirement benefits or wait until full retirement age. I want to consider the aspects of taking benefits now versus waiting. What should I be aware of that will help me decide? – Jim

There are several factors to take into consideration before making this important decision. This is a personal decision; what’s right for one person may not be right for another. It’s good to settle on a decision that’s best for you.

Let’s look at some factors as you consider which option to take.

1)   Your health and family history

Do you have excellent health and expect to continue with relatively good health? Or do you feel as though your poor health is getting in the way of optimal work performance?

Do you have considerable stress in your job? Stress-induced health problems can affect one’s decision to stop working and have a more leisurely pace.

Working too many years in an overly stressful job can limit your life span. (Source: actuarial study of “Longevity vs. Retirement Age” by Dr. Ephrem Cheng). If you are feeling the consequences of stress-related work, you might consider opting for early benefits.

Consider your family history and life expectancy. Did your parents and grandparents live into their 80s and 90s? Were they productive citizens with few health concerns during those years? If you also expect to live longer than average, you may want to delay retirement.

2)   Your work plans

If you’re considering taking early benefits, do you intend to continue working? This would be a mistake, according to Pennsylvania Institute of Certified Public Accountants (PICPA). Why? There is an “earnings cap” penalty when Social Security payments are made before one’s full retirement age. When you collect benefits early, between age 62 and your full retirement age, and your job brings in more than the cap, you’d lose $1 in benefits for every $2 earned over the annual limit.

Beginning with the month of your full retirement, you’re eligible to get your benefits without a limit on your earnings, according to The Wall Street Journal. But also be aware that this is in reference to penalties tied to earnings. “Any work you do is also subject to income tax, and could cause your Social Security benefits to be subject to tax, as well” WSJ.

In retirement, tax rates can vary. However, retirees that have money in tax-free Roth accounts, tax-deferred 401(k) and IRAs can plan for the optimal time to withdraw their funds.

3)   Your surviving spouse benefits

Many couples don’t realize their decision of when to claim Social Security benefits can possibly affect their spouse’s benefit.

A surviving spouse is qualified to 100% of the benefits of the primary wage earner. For the surviving spouse to receive the most income, delay retirement until full retirement age to begin receiving benefits.

4)   Your retirement savings and standard of living

Are you satisfied with the amount of retirement savings you have set aside? Do you have a 401(k) or similar plan with savings? Are you, or will you be drawing a pension?

Have you thought about what kind of standard of living you’d like to have in your retirement years? Have you planned carefully so you are financially prepared to have the affordable lifestyle you would like?

Financial advisors are finding that many Boomers underestimate their debt. They are carrying debt into retirement with mortgages, car loans, college loans, and credit card debt.

How much of one’s income will Social Security benefits provide? It “provides 50% of the income for more than half of married retired couples and about 20% for high earners,” according to Money magazine.

In general, Social Security benefits will not be adequate to cover one’s living expenses during retirement. For individuals who receive Social Security retirement benefits, the average monthly benefit is $1,131. When thinking about retirement, it’s important to focus on how you will supplement your benefits. Employer-sponsored programs and individual investments and savings fill in the gap.

More families are realizing they need to work longer to set aside more funds for their retirement years. For many of them, their retirement savings is not yet at a level with which they are comfortable.

To have a comfortable retirement, financial analysts advise to save early and often. Save as much as you can while working. Work as long as you are able. Plan ahead so you can draw from several income sources.

5)   Reduction in benefits for early retirees

Retirees who start to collect Social Security benefits early at age 62 usually receive 25% less in benefits than if they had delayed to claim benefits until their full retirement age. To maximize your benefits for the longer term, it’s beneficial to wait.

Payout example:  Early retirement age (62): Receive $900 per month

                                  Full retirement age  (66): Receive $1,200 per month

There is considerable monetary advantage for delaying your benefits.

In conclusion, it is ideal when people, having weighed the factors, are able to choose the most convenient time to take their retirement benefits.

Copyright 2014. All rights reserved. Permission to reprint required.

Deborah Nayrocker writes on personal money management topics, showing others how to take control of their financial future. She is the award-winning author of The Art of Debt-Free Living and Living a Balanced Financial Life. 

Publication date: March 31, 2014