The decision to retire at 64 instead of 65 can have a substantial impact on your finances, primarily affecting your Social Security benefits and the longevity of your retirement savings. While one year might seem insignificant, the cumulative effect over a decades-long retirement can amount to a significant sum.
Social Security Benefits: The Core Impact
One of the most significant financial considerations when retiring early is the reduction in Social Security benefits. Your Full Retirement Age (FRA) is determined by your birth year. For most people currently nearing retirement, the FRA is 66 or 67. Claiming Social Security benefits before your FRA results in a permanent reduction in your monthly payment.
If your FRA is 66 and you retire and claim benefits at 65, your monthly payment will be reduced by approximately 6.67%. If you retire and claim at 64, the reduction increases to roughly 13.33%. This reduction is permanent and will affect every Social Security check you receive for the rest of your life. The difference in a single year of early claiming can accumulate into tens of thousands of dollars over a typical retirement.
Let's consider an example. If your monthly Social Security benefit at your FRA of 66 is \$2,000:
- Retiring at 65: Your monthly benefit would be approximately \$1,867 (a \$133 reduction).
- Retiring at 64: Your monthly benefit would be approximately \$1,733 (a \$267 reduction).
Over 20 years of retirement, the difference between retiring at 65 and 64 would be \$(267 - 133) * 12 * 20 = \$32,160. This is a substantial sum that could cover several years of living expenses or unexpected medical costs.
Factors Affecting Social Security Reductions
- Full Retirement Age (FRA): This is the age at which you are entitled to 100% of your Social Security benefit. It varies based on your birth year.
- Months Claimed Early: The reduction is calculated on a monthly basis. Each month you claim before your FRA incurs a further reduction.
- Primary Insurance Amount (PIA): This is your basic Social Security benefit before any adjustments for early or delayed claiming.
Impact on Retirement Savings
Beyond Social Security, retiring a year earlier also means you will be drawing from your personal retirement savings (401(k), IRA, etc.) for an additional year. This has a dual effect:
- Reduced Growth Potential: Your investments have one less year to grow through compounding. Depending on your portfolio's returns, this could represent a significant amount of lost growth.
- Extended Withdrawal Period: Your savings will need to last for a longer period, increasing the likelihood of running out of money, especially if you haven't saved aggressively.
Comparison Table: Retiring at 64 vs 65 (Hypothetical)
| Feature | Retiring at 64 | Retiring at 65 |
|---|---|---|
| Social Security Benefit | Reduced by ~13.33% (assuming FRA of 66) | Reduced by ~6.67% (assuming FRA of 66) |
| Years of Savings Withdrawals | 1 year longer | 1 year shorter |
| Investment Growth | 1 less year of potential compounding | 1 more year of potential compounding |
| Healthcare Costs | Potential gap until Medicare (age 65) | Less likely to have a gap until Medicare |
| Total Retirement Income | Significantly lower | Moderately lower |
| Impact on Financial Security | Higher risk of outliving savings, less flexibility | Moderate risk, more flexibility |
Bridging the Gap: Healthcare and Other Considerations
Retiring at 64 also presents a critical healthcare challenge for many in the United States. Medicare eligibility typically begins at age 65. This means a retiree at 64 would face a full year without Medicare coverage, often necessitating expensive COBRA plans, private health insurance, or a reliance on a spouse's plan. The cost of this interim healthcare can be substantial and must be factored into the decision of how much money will I lose if I retire at 64 instead of 65.
Other Financial Considerations
- Pension Eligibility: Some pensions have age requirements. Retiring early could affect the amount or even the eligibility of your pension.
- Employer Benefits: You might lose access to employer-sponsored benefits like life insurance, disability insurance, or health savings account (HSA) contributions.
- Part-Time Work: Some individuals choose to retire early from full-time work but engage in part-time employment to bridge the income gap and delay claiming Social Security.
- Spousal Benefits: Your decision to claim Social Security early can also impact the benefits your spouse might receive based on your earnings record.
Conclusion
The decision to retire at 64 instead of 65 carries significant financial implications, primarily concerning reduced Social Security benefits and diminished retirement savings. While personal circumstances and health may necessitate an earlier departure from the workforce, it's essential to meticulously calculate the potential financial loss. Careful planning, including exploring options like working part-time or utilizing bridge income strategies, can help mitigate these effects and ensure a more secure retirement. Consulting with a financial advisor is highly recommended to assess your individual situation and craft a personalized retirement strategy. Learn more about Social Security benefits.
