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Rethink your budget if retiring early

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NEW YORK (6/19/12)--If you're drawing on Social Security earlier than you'd planned, you have company. Joblessness has forced 200,000 more people to file first-time Social Security claims in 2009 and 2010 than predicted, and the trend is continuing. And more people ages 55 to 64 are looking for part-time work (New York Times June 9).

Whether you're taking early retirement with or without Social Security benefits, don't get caught by surprise. Take certain factors into consideration when planning your budget.

If you're claiming Social Security:

Calculate possible reduced benefits--If you live in the U.S. and retire early, your benefit can be permanently reduced by as much as 30%. In addition to that reduction, if you hold a job, in 2012 the Social Security Administration will deduct $1 from your benefit for every $2 you earn above the $14,640 limit. In the year you reach full retirement age, the administration uses a different formula and upper limit: $1 for every $3 you earn above $38,880.

Starting with the month you reach full retirement age, there is no limit on your earnings.

Use net earnings to calculate income--Many retirees make the mistake of assuming they won't pay taxes on Social Security benefits. In fact, the federal government taxes Social Security benefits as ordinary income and many states follow suit.

Not only might you owe more taxes than you planned, you could be in for a double surprise. If you don't withhold enough from your pay, you could be hit with a penalty at tax time. To avoid this, adjust your withholdings so that your tax payments match your actual tax liability.

Even if you don't claim Social Security benefits:

Take health care costs into account--If you retire before you reach age 65, you don't qualify for Medicare. Your health care can cost tens of thousands of dollars if you don't have access to insurance coverage through a spouse or employer.

Even after you turn 65, there are many gaps in Medicare and it's helpful to have additional health insurance.

Remember the expenses of working--Calculate the expenses of commuting, parking, work-appropriate clothing, meals and so forth. Eating out can cost as much as an hour's wages.

Revisit your pension--If you have a pension plan, it's probably calculated using a formula partially based on your salary in the years before you retire. Before you trade in a full-time position for a part-time one at your company, discuss it with your pension administrator to find out how or if it will affect your pension.

Finally--If you file for Social Security early but your situation changes, you can file Social Security Form 521, "Request for Withdrawal of Application." This lets you withdraw from the program and pay back all benefits you have received. You can do this only once, and only within 12 months of when you became eligible for benefits.

For more retirement information, read "Four Key Steps to No Regrets Retirement" in the Home & Family Finance Resource Center.