Does it make sense for a person to choose to retire prior to full retirement date? That depends on a number of factors.

Reduced Benefits

People who qualify for social security retirement benefits can begin receiving those benefits in the month after they reach age 62, or any month after that, even though they won’t reach full retirement age for a few more years. Choosing to take an early retirement benefit means the amount of the benefit will be permanently reduced.

Early retirement reduces the PIA by 5/9 of 1% for every month, up to 36 months early. That works out to 6.67% per year. If early retirement benefits start more than 36 months early, each additional month will reduce the benefit by 5/12 of 1%. That works out to 5% per year.

Here’s an example. Suppose a prospective retiree’s normal retirement age is 66. He decides to take early retirement at age 62. Say also that the normal benefit works out to be $1,600 per month at age 66. The benefit percentage will be reduced for each month of the four years that the benefit is starting early. The reduction is 20% (36 months times 5/9 of 1%) plus 5% (12 months times 5/12 of 1%). The monthly benefit will be $1,200—a reduction of 25% of the normal retirement benefit.

So does it make sense to take early retirement benefits from a total payout perspective? It depends on life expectancy.

Consider the early retirement benefit example just discussed. The full retirement benefit at age 66 is $1,600/month. The early retirement benefit at age 62 is $1,200/month. Let’s also assume that life expectancy for this retiree is age 87—25 years after the early retirement benefit begins.

If early retirement benefits begin at age 66, the total retirement benefits paid will be $360,000 (300 months times $1,200/month). If the retiree waits to age 66, the total amount of benefits paid will be $403,200 (252 months times $1,600/month). The total payout is substantially higher if the retiree waits until full retirement age.

Think About It is written by Stephan R. Leimberg, JD, CLU and co-authored by Linas Sudzius June 2009

Jeff Johansen

Jeff Johansen

Founder at Lifeline Solutions
Jeff Johansen

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