Social Security is one of the most valuable sources of retirement income for most Americans, providing inflation-adjusted income that lasts for life. If you plan to retire early, whether in your 40s, 50s or early 60s, it’s important to understand how leaving work sooner can affect your benefit and how to plan around it.
Qualifying for benefits
According to the Social Security Administration, you generally need 40 work credits to qualify for retirement benefits. You earn credits by working and paying Social Security taxes, up to four credits a year, based on your earnings. That means it typically takes about 10 years of work to qualify.
Once you’ve earned 40 credits, you’re eligible for retirement benefits even if you stop working, though the amount of your benefit depends on your earnings history.
How your benefit is calculated
Your benefit is based on your highest 35 years of earnings, adjusted for historical wage growth. The SSA averages these indexed earnings to calculate your average indexed monthly earnings, which is then used in a formula to determine your primary insurance amount, the benefit you’d receive at full retirement age.
If you have fewer than 35 years of earnings, the missing years count as zeros, which lowers your average and your benefit. This is a key consideration for early retirees.
The benefit formula is also designed to replace a higher percentage of earnings for lower earners. Because of this, the reduction in benefits from early retirement may be smaller than you might expect, especially if your earlier years included high earnings.
Stopping work versus claiming benefits
Retiring and claiming Social Security are separate decisions. You can stop working at 45 and still wait until 62, your full retirement age or 70 to claim benefits. Many early retirees bridge the gap between leaving work and claiming Social Security with savings and investments.
You can begin claiming retirement benefits as early as age 62, but claiming early permanently reduces your monthly benefit compared with claiming at full retirement age. Full retirement age depends on your birth year and is 67 for people born in 1960 or later.
Delaying past full retirement age, up to age 70, increases your benefit through delayed retirement credits. Waiting from full retirement age to 70 can increase your monthly benefit significantly, providing a larger guaranteed income for life.
Choosing when to claim
The right claiming age depends on your health and life expectancy, your other income and savings, your marital status and your financial needs. Married couples should consider spousal and survivor benefits. When the higher earner delays claiming, it can increase the survivor benefit available to the surviving spouse.
For early retirees with enough savings to cover expenses, delaying Social Security can provide valuable protection against longevity risk and inflation later in life. Others may need to claim earlier for financial reasons.
Working while receiving benefits
If you claim Social Security before full retirement age and continue working, the earnings test may apply. If your earnings exceed an annual limit, the SSA temporarily withholds some of your benefits. Once you reach full retirement age, your benefit is recalculated to give you credit for withheld months. Check current earnings limits on ssa.gov.
Check your record
Create a free my Social Security account at ssa.gov to see your earnings history and estimated benefits at different claiming ages. The estimates assume you’ll continue working until you claim, so if you plan to retire early, your actual benefit may be lower than shown. Some online tools let you model the effect of stopping work early.
Errors in your earnings record can lower your benefit, so review it regularly. If you find mistakes, contact the SSA with documentation, such as W-2s or tax returns, to correct them.
Plan for health insurance
Medicare eligibility generally begins at 65, regardless of when you retire or claim Social Security. Early retirees need to plan for health insurance until then, such as through the Health Insurance Marketplace, a spouse’s employer plan or COBRA. Health insurance costs can be one of the largest expenses for early retirees.
Plan for uncertainty
Social Security’s trust funds face long-term funding challenges, according to the program’s trustees, and Congress could change benefits, taxes or eligibility rules in the future. Many early retirees plan conservatively, treating Social Security as one part of a broader income plan rather than relying on it entirely. Some estimate their plans with reduced benefits to build in a margin of safety.
Get personalized guidance
Social Security rules can be complex, especially for married couples, divorced individuals and those with pensions from jobs not covered by Social Security. The SSA website offers calculators and information, and a fee-only financial planner can help you create a claiming strategy that fits your early retirement plan.
Content on The Evergreen Edit is for educational and informational purposes only and is not individualized financial, investment, tax or legal advice. Learn more.
This article is for educational purposes only and isn't personalized financial, tax or legal advice. Consider talking with a qualified professional about your situation.
Kiara Miller — Founder & Editor
Kiara Miller is the founder and editor of The Evergreen Edit. He has been doing independent finance research for two decades and reviews every article before it's published.
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