Why early retirement could cost you thousands | Smart Change: Personal Finance

(Steven Walters)

Retirement early is a dream for many people. Some want to spend more time with family, some want to travel the world, some want to delete things from their to-do list, and some just want to have the option to sit back and do nothing.

Whatever the case, the opportunity to retire early should be celebrated. But like most things in life, there are pros and cons to retiring early—and one downside is that it can cost you thousands.

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Social Security benefits can be reduced

Working Americans spend years paying Social Security taxes with the ability to receive Social Security benefits in retirement plan. For many people, it plays a huge role in financing their retirement. You can start receiving Social Security payments as early as age 62, but you won’t get your full benefits until you reach your full retirement age, either 66 or 67, depending on the year you were born.

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Here’s how the full retirement age is calculated

Year of Birth full retirement age
From 1943 to 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Data source: Social Security Administration.

If you’re considering early retirement, it’s important to understand how much your Social Security benefits will be reduced until you reach full retirement age. Interest is reduced five out of nine at 1% for each month up to 36 months. If you retire more than 36 months before your full retirement age, any month beyond 36 months will be reduced by five twelve by 1% each month.

Assuming you will retire at age 62, here’s how much benefits you get by the time you reach your full retirement age.

Year of Birth months until full retirement age interest reduction
From 1943 to 1954 48 25%
1955 50 25.83%
1956 52 26.67%
1957 54 27.50%
1958 56 28.33%
1959 58 29.17%
1960 or later 60 30%

Data source: Social Security Administration.

The average monthly Social Security retirement benefit is just over $1,600. If you are in a position to receive $1,600 a month from Social Security but your benefits are reduced by 25%-30%, you could be losing thousands annually.

You miss an employer 401(k) match.

One of the best advantages of having a 401(k) plan is the opportunity for your employer to match your contributions. Employers will generally match a certain percentage of your contributions, which is basically a guaranteed 100% return on the money. If you earn $100,000 and contribute 4% to your 401(k), you’ll save $4,000 annually. If your employer matches 4%, your savings come to $8,000.

Early retirement takes you from the time you can earn an employer matching your contributions, and depending on when you retire early, can easily add up to tens of thousands of dollars. Using the example above, even five years early retirement could mean losing $20,000 in “free” money from your employer.

Be aware regardless

If you’re in a position to retire early, you’re probably not tied to cash or wondering where your next meal is going to come from (otherwise you wouldn’t even consider early retirement). However, knowing the financial implications of early retirement is important. Even if reduced Social Security benefits or a company 401(k) plan mismatch doesn’t hurt you, you should always try to be aware of your financial situation and how your income will be affected in retirement.

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