Quitting Work Before Retirement Age

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Why Retire Early?

Sometimes retirement isn't your choice. You'd work longer but economic conditions, your job or your health prevent it.

If you decide to retire early, you might have to live on less if you haven't prepared to quit working early. You'll have less in your pension plan and your Social Security retirement benefits will be less -- and you'll have more retirement years to cover. Instead of adding to your retirement accounts and savings, you'll be drawing from them to pay monthly expenses.

Less Retirement Money

A few more years of saving can make a difference in your retirement stash. If you started seriously saving for retirement in your 20s and kept it up, you may have enough money for early retirement without feeling the pinch.

You can also make a difference by contributing the maximum each year to a 401(k), IRA, 403(b) and savings accounts.

If you haven't prepared for early retirement with these saving measures, you'll likely feel the effects of quitting work before retirement age. You'll have to squeeze the most out of every penny. You might want to take a part-time job or turn a hobby into profit to make up the difference.

Less Social Security

If you choose to take early retirement, you can draw Social Security retirement benefits at 62 if you have enough work credits to qualify.

You can't draw full retirement benefits until you reach full retirement age. Social Security full retirement age is 66 if you were born before 1960 and age 67 if you were born in 1960 or later.

You give up about 25 percent of your full monthly benefits if you take early retirement at 62. In other words, if you would receive $2,000 at full retirement age, you'll get $1,500 at age 62.

More Retirement Years

Quitting work before retirement age takes years off your earnings.

A few calculations can give you an idea of the impact. If you quit work at 56 instead of 66, you reduce your earnings by 10 years and add 10 years to your retirement needs.

A "USA Today" poll reported by "U.S. News & World Report" shows that it takes about $50,000 minimum income to be happy. You may not be happy with that amount, but at that rate, you'll need about $500,000 for the 10 years you add to your retirement.

Part of that comes from your Social Security retirement benefits, assuming they hold up for your lifetime. The average monthly Social Security benefit for a retired worker in 2012 was $1,230 a month, or $14,760 a year.

Using these figures and assuming you are retirement age for Social Security, you'll need about $350,000 in addition to your Social Security for the 10 years of early retirement. Additional funds may come from your pension plan or investments, but these are also less if you quit work early.

Claiming Retirement Funds

You have to be 59 ½ to claim sheltered retirement funds without penalty. That's your IRA or 401(k).

If you quit work before retirement age, you can roll your IRA or 401(k) from your employment into an IRA certificate of deposit with your bank. You won't have to pay the penalty or taxes yet if you use a rollover process.

Contact your local FDIC-insured bank and set up an IRA account.
The interest rate won't be what you want, but your money is secure.
Contact the administrator of your IRA to transfer the funds. You'll have to sign the forms for transfer.
The transfer goes to the bank as trustee, for the benefit of you, the owner. You may see the terminology shortened to U.S. Bank f/b/o and your name.
Once the funds are at your bank, you'll have access to it if you need the money.
You'll pay federal income taxes on any money you withdraw in the year you withdraw it.

That's not true of a Roth IRA or Roth 401(k) as you paid the taxes on these accounts on the front end.

Claiming Social Security

If you have 10 years of employment history paying into the Social Security system, you can qualify for Social Security early retirement benefits at age 62, but you have to apply.

Ninety days before your 62nd birthday is the earliest you can apply for retirement benefits, and benefits won't start until the month after your birthday month or on the date you request. Sometimes it's to your advantage to wait until January following your birthday to claim benefits. See the Social Security Online Calculator or talk with a representative of your local Social Security Office.

You can apply online at the Social Security secure website and your application may go through without question, or you may get notice to bring documentation to the nearest Social Security office. Make an appointment and go to the office in person to speed up the process. Office personnel will make copies and return your originals while you wait.

Social Security issues payments on the second, third and fourth Wednesday of each month.

The issue date for payment depends on your birth date with birth dates late in the month receiving checks the fourth Wednesday. If your birth date is early in the month, your Social Security retirement payment arrives on the first Wednesday of each month.

Social Security no longer issues checks, so your payment goes directly to a bank account or debit card.

Taxes

The IRS taxes your income, even after retirement, and you'll feel taxes more if you quit work early and aren't financially prepared.

If you sheltered your retirement income with an IRA, 401(k) or similar plan, you'll be able to draw without penalty at age 59 ½ -- but you'll owe taxes on the amount you draw. If your taxes total a minimum of 15 percent of the fund, you can count on 85 percent or less for living expenses.

You may also pay income taxes on 50 to 85 percent of your Social Security retirement benefits if you have other income, depending on your tax bracket. If you sign up, the Social Security Administration takes Medicare Part B and Part D out of your retirement check once you're 65, so you'll get less than the full Social Security check after that age.

Another tax you may not expect is FICA, or Social Security and Medicare taxes. If you work and are retired, you must pay these taxes even if you are collecting the benefits.

References

Here are some other articles on retirement if you're interested. Also see our Retirement Living Guide Series for more detailed information.

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