What to Do If you Retire Before 65

I know that for many of you approaching your 60s, part of your retirement plan is to not retire too early. That’s smart. But it’s just a plan. And some plans change midstream.  

The 2021 Retirement Confidence Survey conducted by the Employee Benefit Research Institute reports that nearly half of workers end up retiring before they planned to. 

In this year’s survey, the median age workers said they expect to retire is 65. The median age retirees actually stopped working was 62.  

Often that decision is not one of choice. Such as, illness. Or a need to step in as a caregiver for a loved one. Or a layoff at an age where it can be very difficult to get a new job similar in scope and salary to the one you left. 

If you find yourself retiring earlier than expected, I want you to consider two important moves that are related. 

Don’t settle for a reduced Social Security benefit. If you are in good health, the best financial move you can make is to not claim Social Security before you reach your Full Retirement Age. (FRA). Your FRA is somewhere between the age of 66 and 67 depending on your year of birth. At your FRA you are eligible to collect 100% of your Social Security benefit. But Social Security allows you to start earlier—as early as age 62. When you start Social Security before your FRA you lock in a permanent reduction in your benefit. If you start at age 62, your benefit will be just 70% to 75% of your FRA benefit.  That is a costly cut. 

Keep working (part-time is fine). Rather than start Social Security before your FRA, I want you to consider ways you can afford to delay. If you have money saved in 401(k) and IRAs, tapping those accounts in your early 60s so you can afford to delay starting Social Security is one option. But an even better move is to consider if there is part-time work that would bring in enough money in your early 60s to match (or exceed) what you would be paid by Social Security if you took the reduced benefit. 

On the Social Security website you can get a detailed estimate of your benefit at age 62, at your FRA, and at age 70. (More on age 70 in sec.)  I think for many of you, taking your benefit at 62 might mean an initial benefit of less than $1,500 a month. My question/challenge for you: Can you continue to work part-time and make at least that much after-tax? If you can, please do it—and don’t touch your Social Security until at least your FRA. 

Notice I said “at least your FRA.” The Social Security retirement program offers an opportunity to earn a bonus once you reach your FRA. If you continue to delay starting past your FRA, the program will credit you with an annual increase until you reach age 70. Someone with an FRA of 67 (that’s everyone born in 1960 or later) can earn a guaranteed 8% a year if they delay starting until age 70. That’s a 24% increase between 67 and when you do start at 70. If you are in good health today, having the highest earner in your household delay until age 70 is a smart move. Again, consider using other savings (or continuing to work a little to bring in some income) until you reach age 70.  

Waiting until your FRA is a great goal. Continuing to delay until age 70 is even better, if you can make it work.