Early retirement may be the dream, but as it turns out, very few Americans are living it out.
Just 8% of U.S. workers retire between the ages of 50 and 54, and only 15% end their careers between 55 and 59 years old.
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Setting yourself up to retire at such a tender age is no small feat. And there are a lot of factors to consider — especially when it comes to how you’ll support yourself for potentially another 40 years. If you hope to join this exclusive club, it’s important to consider how leaving work at a young age could impact your Social Security benefits.
Here’s what you need to know.
The financial impact of retiring at 55
Most people qualify for Social Security after 10 years of working and earning work credits.
However, if you work for less than 35 years, you’ll shrink the benefits you get — which could easily happen if you retire at 55, depending on how young you were when you got your first job.
The issue is that your standard Social Security payment equals a percentage of the average wages you earned during your 35 highest earning years (after adjusting wages over time for inflation).
The formula always takes 35 years of earnings into account so if you worked for only four years, your average wage is reduced by a year of $0 income being factored in. The more years you’re short, the bigger the impact on your benefit.
What’s more, if you quit work at 55 when you may have reached your peak earnings due to career advancement, you could still end up reducing your benefits even if you do have 35 years on the job. That’s because if you’d work for, say, five more years until 60, you’d have had five more high-earning years to replace earlier years when you earned less.
However, by quitting young, most or all of your low-earning early years will be included in your benefits calculation. And this will result in a lower average wage being used to calculate your monthly benefit.
If you’re earning a lot more now than you did in the past (on an inflation-adjusted basis), think about whether early retirement is worth shrinking your Social Security checks.
Read more: I’m 49 years old and have nothing saved for retirement — what should I do? Don’t panic. Here are 5 of the easiest ways you can catch up (and fast)
How to make retiring at 55 work for you
Benefits could also be reduced if your early retirement prompts an early Social Security claim.
You can claim benefits as early as 62, but this is before your full retirement age when your standard benefit becomes available. Full retirement age (FRA) depends on birth year and is:
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67 if you were born in 1960 or after
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66 and 10 months if you were born in 1959
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66 and 8 months if you were born in 1958
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66 and 6 months if you were born in 1957
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66 and 4 months if you were born in 1956
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66 and 2 months if you were born in 1955
Every month you claim benefits before full retirement age results in an early filing penalty. Those penalties are:
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5/9 of 1% per month for each of the first 36 months you collect benefits before FRA
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5/12 of 1% per month for any prior month
If you have an FRA of 67 and claim benefits at 62, this results in a 30% cut to your standard benefit. By contrast, working beyond FRA allows you to earn delayed retirement credits equal to ⅔ of 1% per month until age 70. Those could raise your checks 8% per year until your 70th birthday.
These penalties and credits have a big effect. Say you were on track for the average Social Security benefit of $1,976 monthly in 2025.
A 30% cut to benefits would bring that down to $1,383.20 if you got your first payment at 62 when your FRA was 67. By contrast, had you waited until 70, you could have increased that by 24%, bringing your payment up to $2,450.24. Claiming at 62 instead of 70 would cost you $1,067.04.
These are big reductions. If you’re going to retire at 55, think seriously about putting off your Social Security claim as long as you can.
You’ll need to make sure you have enough savings in the meantime to support yourself without retirement checks and, since tax-advantaged retirement plans limit withdrawals until 59 ½, you must make sure you have it in the right accounts.
Working with a financial adviser can help you ensure your investments will support you until the right time to claim Social Security comes along, so you aren’t left with regrets.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.