You Can Apply For Social Security Early, But There's One Catch You Should Know

Knowing when to retire can be as complicated as knowing where, exactly, to retire. From economic to emotional and even physical considerations, determining the right age to retire is ultimately a deeply personal choice. While Money DIgest previously spoke with a CFP who warned against retiring too early due to both the financial and emotional strain the transition to retirement can cause, some might not have a choice. According to a 2023 survey from Edward Jones, around 40% of Americans reported being forced into retirement, while a 2018 study from ProPublica found that 56% of workers over the age of 50 were forced out of their job before they wanted to leave.

Similarly, medical issues and disabilities can force older workers to leave the workforce earlier than they might want. All of this is to say that whether you might want to retire early, or you aren't given a choice, it can be important to understand the financial ramifications of doing so. More specifically, retiring early can have significant consequences for Social Security, which only allows for a worker to collect their full benefits amount if they wait to start collection until after their full retirement age (which is 66 or 67 depending on the year you were born). While Social Security was never meant to function as the singular source of income during retirement, it can be a significant portion of many retirees' budgets. This means that understanding the exact benefit cuts involved with early retirement can be crucial to properly planning your golden years.

The biggest consideration when deciding when to apply for Social Security benefits is what your monthly benefits amount will be. This amount can change depending on a number of factors. For starters, choosing to retire early can lead to significant benefits cuts. Workers can begin filing for benefits as early as 62, but can face up to a 30% reduction in their monthly benefits amount, according to the Social Security Administration. To be more specific, a benefit amount is reduced by 5/9 of 1% for every month that a person retired before their full retirement age (up to 36 months). However, for those who retire even earlier than three years before their full retirement age, their benefit amount is reduced by an additional 5/12 of 1% for every month.

While these fractions of percentages might not seem very significant, they can add up and fast especially depending on just how early you end up retiring and filing for benefits. For the sake of this example, let's say your full retirement age is 67 (which is the case for those born in 1960 or later). If you decide to retire right at 62, when you are first able to, that means you will begin collecting five years before your full retirement age (or, 60 months). 36 of those months would be calculated at a loss of 5/9 of 1% for every month, while the other 24 months would be calculated at a loss of 5/12 of 1%. This would leave a retiree with a 30% total reduction in their benefits.

For those concerned about their monthly benefits amount, it's important to also consider the possibility of delaying retirement. Social Security will actually increase your benefit amount depending on how long you defer filing for benefits. The nitty gritty math of these delayed retirement credits is an additional 2/3 of 1% every month you delay. Essentially, for every full year you delay retirement past your full retirement year, you receive an 8% increase to your monthly benefit amount. However, these 8% bumps max out at age 70, meaning there is no additional benefit for delaying retirement past age 70.

It's also worth considering that Social Security is currently heading for a funding cliff, with its trust funds due to run out beginning in 2033. This will lead to a significant cut in benefit amounts for retirees. Similarly, many in the Republican Party have already floated the idea of further pushing back the age of full retirement to 70 as a way to help the program's funding shortfall. It's worth noting that the full retirement age was previously increased (away from 65 to the gradual increase of 67 we have today) back in 1983. This initial increase of full retirement is estimated to have cut overall benefits for retirees by 13%. The current discussion surrounding raising the age to 70 is estimated to cut current benefits by almost 20%. This means that workers would receive significantly less in overall retirement benefits, which would disproportionately affect young people.