My Dad is thinking about taking an early retirement. Is there a downside to this?
Before making the decision to retire early, your dad must fully understand his options regarding drawing on his Social Security retirement benefits. He can:
- Retire at age 62, but this is considered “early retirement” so he’ll face a permanently reduced rate in his benefits.
- Retire at his “full retirement age” of 66 years of age without any reduction in social security benefits.
- Retire as late as age 70 and receive special retirement credits added to his benefits because he delayed his retirement.
Many people don’t realize that the magic retirement age of 65 is changing to compensate for the huge number of Baby Boomers about to retire. For example, those born between 1943 through 1954 will reach their “full retirement age” at 66 years, not 65 as it was for their parents.
Social Security retirement benefit calculations are based upon a person’s average earnings during his or her lifetime of work under the Social Security system. For most current and future retirees, the 35 highest years of earnings will be averaged to calculate benefits. According to Alicia H. Munnell, director of the Center for Retirement Research at Boston College, Social Security today will replace only one-third of the typical 63-year-old’s pre-retirement income. That means if you hope to have a healthy retirement for 25-30 years, you can’t rely on Social Security alone to meet your income needs during the “golden years.” T. Rowe Price Associates suggest that for every year you postpone your retirement, you’ll be able to increase the dollar amount of your withdrawals from savings by 13 percent.
If your father is in good health, there are some very positive reasons to keep working. First up, he won’t be tapping into his nest egg of savings, so if he enjoys a long life, his nest egg will last longer and its assets will continue to grow. He can continue to save and hopefully, invest in a 401(k) plan with contributions from his employer. If his employer provides health insurance, then he’ll be saving a good deal by not having to pay for his own health insurance until he reaches the age of 65 years when Medicare kicks in. Your father can also use these few additional years of working to pay off all or most of his debt which can dampen any retirement when you find yourself living on a fixed income.
If you father does plan to continue working, he needs to know that there are limits on how much he can earn each year before affecting his Social Security retirement benefits, and he should check with Social Security to learn the amount. Even if your father works following his full retirement age, he’ll still need to pay Social Security and Medicare taxes on his earnings. The same is true if he is self-employed.
Overall, experts advise that if you enjoy good health and your family tree celebrates parents and grandparents who’ve lived into their 80s or 90s, then delaying taking your benefits until full retirement age or later could be a very wise move. This will protect your father from outliving his savings, pensions, annuities and other assets – some of which may have limits on how long they will be paid.
The Social Security Administration (SSA) offers a tool kit on retirement planning and several “calculators” to help your father estimate how much he’ll realize in benefits at different ages for retirement. Just go to ssa.gov
or give them a call at 1.800.772.1213 (TTY 1.800.325.0778). You can also visit the local Social Security office.
Whether or not to retire early is a very important decision with life-long ramifications, so be sure to have your Dad take advantage of the financial guides available from SSA and groups like AARP
which offer tools such as the “Roadmap to Retirement (1.888.687.2277). Your father may also do well to talk with a financial planner specializing in retirement.