What employment extenders need to know about ‘early retirement’ and Social Security

Since publishing research on employment extenders early last year, Voya Cares has been sharing information about the decision points that often take workers who are turning 65 and up by surprise. To help them navigate these decisions points, Voya Cares is providing a curated series of articles exploring considerations that need to be taken into account beginning at age 62 and extending beyond the 65th birthday.

Few know what age they are eligible for full retirement benefits: only 13% of adults correctly guess their full retirement age based on their year of birth, guessing on average 60 years old, according to a recent poll.

The most basic knowledge all employees should have is what their full retirement age is and how early retirement can affect their Social Security (SS) retirement benefit amount. Once this elementary knowledge is understood, however, there are a host of considerations and decision points ― both monetary and lifestyle — that employment extenders need to consider before making the decision to retire “early.”

To start the decision-making process, pre-retirees should take into consideration such factors as life expectancy, the health of the individual involved, cash flow needs to maintain a desired lifestyle, other special expenses that might be anticipated, as well as additional factors such as family members with disabilities and special needs.

If the prior list wasn’t overwhelming enough, here are some other lesser known factors to consider when making the decision of when to begin collecting SS retirement benefits.

Age is only a number, except when it comes to early retirement

The minimum age at which a worker can collect SS benefits is age 62, which may seem like a tempting opportunity. However, claiming SS at age 62, rather than waiting until full retirement age (FRA) is reached, means a 30% reduction in monthly benefits. On the other hand, benefits are increased by 8% for every year retirement is delayed past FRA up to age 70. Depending on work history, waiting to start Social Security may result in approximately $100,000 or more in additional money over a lifetime.

One costly misconception is that almost half (49%) of adults mistakenly believe that if they file for Social Security earlier, then their benefits will automatically go up once they reach their full retirement age. This “early retirement” penalty is permanent and results in a smaller benefit year after year.

The break-even point

Although the promise of bigger monthly payments might make delaying retirement seem like the best choice, it’s important to realize that waiting to receive bigger benefits also means receiving fewer payments over the course of a lifetime. Accordingly, it’s important to find the age at which the cumulative amount of money received if filing later equals the cumulative amount of money received if filing early. This is the break-even point, or the point at which it “pays off” to wait.

In order to determine the break-even point, begin with estimating life expectancy. Individuals who expect to live a long time might decide that it’s better to wait and get a higher monthly benefit rather than taking a smaller monthly amount sooner.

Other considerations

Reduced benefits: collecting SS while still working

Collecting SS benefits and continuing to work up until reaching full retirement age, could reduce payment amounts, as well, if the annual earnings from work exceed a certain limit. The limit is $22,320 in 2024. That limit no longer applies if benefits start after age 67.

The compensation benefits of a job could also affect SS. Some companies allow stock awards to continue to vest (pay out, and as a result, incur income taxes) after the retirement date, and even into years to follow. These payouts are considered income and could cause SS payments to be taxed or taxed at a higher level than in years after the awards have fully distributed. Delaying Social Security payments until those other income sources have been reported for tax purposes is worth consideration.

Other family members’ well-being: will they benefit by collecting Social Security payments based on a spouse’s or parent’s earning record?

Spouses or dependent children may be eligible for family or survivor benefits based on a family member’s SS record; these benefits are available to eligible dependents resulting from one of three life events: death, disability or retirement by either wage earner.

In the case of family benefits, it’s possible that one household may receive a higher total amount if two (or more) members each are receiving a benefit, even if they both are collecting a smaller payment due to an “early” claim. Be aware that the benefit amount is greatly impacted by the age of filing and both SS participants’ wage earnings.

In addition, survivor benefits provide monthly payments to eligible family members of people who worked and paid SS taxes before they died. As with family benefits, the amount of the survivor payments is greatly impacted by the age of the survivor and both social security participants’ wage earnings.

For both family and survivor benefits, Social Security representatives will assist in calculating a payment estimate to make sure that the maximum benefits are being received.

Ultimately, the dependent’s need for income is a key part of this family decision but being aware of the FRA and the long-term effects of filing for SS benefits early — for both the dependent and the family member whose earnings record is being filed against — should be taken into consideration.

Medical coverage: a bridge to Medicare at age 65

Remember that while individuals are eligible for reduced SS benefits at 62, they won't be eligible for Medicare until age 65, so they will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of one’s SS payments.

Workers who are considering early retirement may want to explore the quality and cost of “bridge” health insurance before making that leap, including through their state-run health exchanges. If good, affordable coverage is not available otherwise, working until age 65 when Medicare coverage can begin may be a favorable option.

Gender: more to consider for women

Women often live longer than men, and they're more likely to have to depend on one income when they're older. Retiring early before reaching FRA may look attractive to women in their sixties; however, by the time they get into their 80s, they have fewer financial options. Many women find themselves in caregiver roles in their sixties — for spouses, aging parents, adult children with disabilities and health issues. The decision to leave the workforce at age 62 because of current demands on time, limited finances or health issues may not allow for a more long-term look at the future.

But there's even more to the story. Social Security is based on an individual’s highest 35 years of earnings, which for women often doesn’t happen until the upper end of their lifetime earnings trajectory. Working a few more years at their highest earning level could increase how much Social Security they are eligible to collect. At the same time, working longer provides more time and resources to prepare for retirement, perhaps by making “catch-up” contributions to tax-deferred workplace savings vehicles, allowing larger amounts of money to be set aside for retirement.

Other work-related considerations: tax-advantaged savings opportunities and future cost-of-living-increases

Lastly, deciding to stop working at 62, also means that tax-advantaged savings opportunities cease, such as Health Savings Accounts. And although it may seem small, at first, deciding to claim Social Security early, and the corresponding capping of Social Security benefits throughout retirement, means that there is a smaller benefit base for COLA adjustments, which can be disadvantageous during high inflation.

Overall, the decision to retire early and collect SS benefits is a personal decision with many factors that may not be solely financial. It may make sense to retire early due to health issues or an interest in moving into a new chapter in one’s professional life. Working with a financial professional who focuses on Social Security and retirement planning may help older workers understand the nuanced details that come into play when considering early retirement.