- You’re claiming five years early, which translates to 60 months.
- For the first 36 months, multiply five-ninths of 1% by 36. That equates to 20%.
- For the remaining 24 months, multiply five-twelfths of 1% by 24. That gives you another 10%.
- Add the 20% and 10% together to get a total reduction of 30%.
Looking at the average Social Security benefit at FRA of about $1,500, a 30% cut would reduce that amount by $450 to $1,050 per month.
How to retire early anyway
A 20% or 30% decline in retirement income is a lot, but you can make a lower benefit work by planning ahead. You’ll likely need to attack the shortfall from both sides — by lowering your living expenses and increasing your retirement income. You can often find the largest expense reductions in your debt. Aggressively pay down your high-rate credit cards and look to pay off or refinance your mortgage. After those big moves, there are many other, smaller cost-cutting measures to take, such as cancelling subscriptions, shopping around for cheaper car insurance, and cooking more meals at home.
Investing for passive income
Whittling down those expenses now, before you retire, should free up cash that you can then invest for passive income in retirement. You can earn passively in a variety of ways, but dividend income is particularly appropriate for retirees. Unlike small business income or real estate rents, dividend income requires very little work on your part. Plus, the right dividend-paying securities will provide you increasing income as well as gains from share price appreciation.