The financial cost could be bigger than you might think.
Retire early. That’s the goal for many Americans. No more working eight or more hours each day. You’d be able to spend more time with family and friends and enjoy your hobbies.
The biggest downside to taking this route, though, is that there’s a price to be paid. In particular, your Social Security retirement benefits will be much lower than they’d be if you waited to retire. How much will it cost you to take Social Security at age 62 instead of age 67? Let’s take a look.
A steep penalty
Social Security penalizes taking benefits before the full retirement age. Your benefit will be reduced by five-ninths of 1% for each month you retire early up to 36 months. Collecting retirement benefits earlier than that will result in an additional penalty of five-twelfths of 1%.
Let’s assume that your full retirement age is 67. That’s a reasonable assumption for anyone contemplating retiring at 62, since 67 is the full retirement age for all individuals born in 1960 or afterward. If you collect Social Security retirement benefits exactly at age 62, your benefit will be reduced by 30%.
In August 2023, the average monthly benefit for retired workers was $1,840. A 30% reduction to this benefit amounts to $552 per month, or $6,624 per year. The maximum Social Security benefit in 2023 for anyone receiving benefits at full retirement age is $3,627. A 30% reduction to this benefit is around $1,088 per month, or $13,057 per year.
If you want to get a more personalized estimate of how collecting Social Security retirement benefits at age 62 instead of age 67 could cost you, you can create a my Social Security account and use the online benefits calculator. You can also get a less precise estimate by using the Social Security Administration’s online Quick Calculator.
Two other factors to consider about retiring at 62
The 30% Social Security benefits penalty is only one cost of retiring at age 62. There are also a couple of other factors to consider.
First, the Social Security benefits formula uses the 35 years where you made the highest earnings. Many people earn the most in the later years of their working career. By collecting Social Security retirement benefits at age 62, it’s possible that your primary insurance amount (the benefit you’d be entitled to if you wait until your full retirement age) could be reduced. As a result, your monthly Social Security payment at age 62 would also be lower.
Exactly how much of a financial effect this could have will vary significantly from one person to another. Perhaps it wouldn’t be a large amount in your situation. However, it’s definitely something to keep in mind.
The second factor to consider is health insurance. If you wait until age 65 to collect Social Security retirement benefits, you’ll be eligible for Medicare. On the other hand, if you retire at age 62, you’ll need alternative health insurance for three years.
Some might have access to retirement health insurance through their employer. That’s not the case for many Americans, though. Because Medicare is typically less expensive than private health insurance, you could have to pay a lot more for health insurance if you retire at 62.
Waiting is still the smartest financial move for most
For most Americans, the smartest financial move is to wait at least until your full retirement age to begin receiving Social Security benefits. Your monthly benefits will be even higher by holding off until age 70.
Still, nearly 23% of men and close to 25% of women collect Social Security benefits at 62, according to the Social Security Administration. If you plan to be in this group, be aware of the costs you’ll pay for retiring early.
