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When contemplating their personal finances, many folks often ask: “When is the right time to retire?” However, the “right time” to retire is different for each person, which is what makes defining it so elusive. There are several things that influence the decision-making process, including: your individual financial situation, the ages of your children, your responsibilities to your parents, your work situation, and the age difference between you and your spouse.

The Social Security Administration (SSA) estimates that people applying for early Social Security retirement benefits leave about $120,000 of lifetime benefits on the table. Each year, this adds up to $25 billion that could have been collected by retirees. According to a Government Accountability Office report, those who are most likely to claim Social Security benefits early are those who have physically demanding blue-collar jobs, people who have been out of the workforce for an extended period of time, had longer work histories, or expected shorter longevity (such as not living past the age of 75).

Deciding if one spouse is going to retire early can be a source of conflict. All of a sudden goals are uncertain or changing, communications may become strained — often each side takes a position and argues for that position. However, there are positive steps you can take to reduce conflict, including determining your exact financial situation and coming up with a plan with the help of a financial planner.

Run the Numbers

The next step is to complete a capital needs analysis to determine how much you need to have in your retirement plan, saved and/or invested when you retire. Many individuals discover (to their dismay) that they should have been saving and investing more when they were younger. Financial advisers frequently point out that individuals will need 70-80% of pre-retirement income to have a comfortable retirement. Social Security retirement benefits are geared to replace about 40% of pre-retirement income for the typical worker. This makes having pensions, savings and investments important. There are a number of free calculators to determine the amount you’ll need for a secure retirement. (Here’s one source of free calculators for financial analyses.)

If an early retirement seems feasible, take an in-depth look at your retirement planning. Calculate the impact of early retirement on your company pension, profit sharing and/or 401(k) plan. Exactly how much of a haircut will you take if you retire early? Make an appointment with your Human Resources representative and get the facts before you take any actions. Get a ballpark idea of how much your 401(k) plan will be reduced due to early retirement.

After the in-depth analysis of your financial position and retirement plans, you’ll need to establish exactly how your Social Security retirement benefits will be affected by early retirement. (This analysis may require you to re-calculate your capital needs analysis).

Here are several examples of how early retirement can impact your monthly Social Security benefits. The Social Security website has several calculators that can help you determine your scenario.

1. The earnings record-holder files for benefits before full-retirement age (FRA): There is as much as a 25% deduction for taking Social Security retirement benefits early. For example, let’s say your FRA is 66 and your benefit is $1,600 a month. You retire at age 62, your monthly benefit will be reduced by 25% to $1,200 per month. This amount will not increase when you reach FRA.

2. The spousal benefit is always reduced if Social Security benefits are claimed before the spouses’ own FRA. According to the SSA, a spouse who does not have an earnings record can choose to retire as early as age 62, but doing so may result in a benefit as little as 32.5% of the worker’s primary insurance amount (PIA). A spousal benefit is reduced 25/36 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month. The typical spousal benefit is 50% of the worker’s PIA amount.

For example, if the worker’s PIA amount is $1,600 and the worker’s spouse chooses to begin receiving benefits 36 months before his or her normal retirement age, the SSA first takes 50% of $1,600 to get an $800 base spousal benefit. Then computes the reduction factor, which is 36 times 25/36 of one percent, or 25%. Applying a 25% reduction to the $800 amount gives a spousal benefit of $600. Therefore, in this case, the final spousal benefit is 37.5% of the primary insurance amount. Other items to remember are:

  • This amount will not increase when the spouse reaches FRA.
  • If the earnings record holder has Delayed Retirement Credits (DRCs), those credits will not apply to the base spousal benefit.
  • A current spouse can’t get spousal benefits until the earnings record holder files for retirement benefits.

Note: If the earnings record holder is FRA, he or she can apply for retirement benefits and then request to have payments suspended. That way, the spouse can apply for and receive early retirement “spouse’s only” benefits. This allows the earnings record holder to earn DRCs (to increase benefits) until age 70. For a married couple, only one person can apply for spouse’s only benefits.

3. Social Security early retirement benefits for your spouse and family. The SSA points out that when the earnings record holder starts claiming Social Security retirement or disability payments, other family members may also be eligible for monthly benefits.

For example, if your spouse is age 62 or older he or she can receive spousal benefits. At any age, your spouse can receive benefits if he or she is caring for the earnings record-holder’s unmarried child under the following circumstances:

  • The child or children are younger than age 18
  • The child or children are between age 18 and age 19, but in elementary or secondary school as full-time students; or
  • The child or children are age 18 or older and severely disabled (with the disability having started before age 22)

Note that there is a maximum for family benefits, and the calculation is somewhat tricky. For details, contact a Social Security representative.

Things to Consider

If your spouse wants to retire early, he or she may have an excellent reason for doing so. Maintaining open communications and focusing on realistic financial planning can assist you in determining if early retirement is feasible. After a “reality check,” stay on top of your finances.

Next, it may be necessary to negotiate how you start early retirement. You may need to begin with several early retirement alternatives such as putting off early retirement for several months or years. Then determining if you can “phase in” early retirement. In other words, work part-time or turn your hobby into a small business. Another approach is providing additional support to the working spouse. (Having one spouse working can cover health insurance and build a larger Social Security benefit.) The early retiree can complete more household chores such as cooking meals, grocery shopping, watching the children or grandchildren, and doing household maintenance. It is important to keep in mind that you will need to talk about everything. Bottom line: It helps to have an advance strategy.

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