Every year you retire before your pension's full retirement age, you lose money permanently. The rules differ by plan, but the math is consistent: early retirement benefits are actuarially reduced to account for the extra years they will be paid. Here is what that reduction typically looks like and how to calculate the real cost of leaving early.
How early retirement factors work
Most defined benefit plans calculate an early retirement factor: a percentage by which your pension is permanently reduced for each year you retire before the plan's normal retirement age. Common structures:
- 5% per year: Most common in private-sector plans. Retire 3 years early: 15% permanent reduction.
- 5/9 of 1% per month (6.67% per year): Used in FERS MRA+10 situations. Retire 5 years early: 25% reduction.
- Rule of 80/85/90: Age plus years of service must equal 80, 85, or 90 for unreduced benefits. Common in state plans.
- Actuarial reduction: Plan applies actuarial tables rather than a flat percentage. Reduction varies by exact age.
The reduction is permanent. It does not go away when you reach normal retirement age. A 15% reduction on a $3,000/month pension is $450/month less every month for the rest of your life.
The service credit cost on top of the early reduction
Early retirement has two separate cost components that people often conflate: the actuarial reduction factor and the years of service you are not accruing. Both reduce your final benefit.
Example: a private-sector employee with a 1.5% times service times final salary formula, currently age 58 with 25 years of service and $100,000 salary. Normal retirement age: 62.
Retiring now at 58: 1.5% times 25 times $100,000 = $37,500/year, then reduced by 20% (5% times 4 years early) = $30,000/year.
Working to 62: 1.5% times 29 times $105,000 (salary grows modestly) = $45,675/year, no early reduction.
The difference: $15,675/year for life. Over a 20-year retirement, that is over $313,000 in foregone pension income from leaving just 4 years early.
State pension early retirement
State pension systems often have more nuanced rules. Many use the Rule of X where your age plus service must reach a threshold. CalPERS uses benefit factors that are lower at younger ages: retiring at 50 uses a 1.1% factor while retiring at 63 uses a 2.5% factor on the same service years. OPERS Ohio requires age 60 with 5 years or specific age-service combinations for unreduced benefits.
The key question for any state employee: what is my unreduced retirement age-service combination, and what is the reduction factor for each year I am early? Your pension statement should show these factors, or request the early retirement factor schedule from your plan administrator.
The honest break-even question
Working longer always increases the pension. The real question is whether the additional pension income is worth the additional working years given your health, job satisfaction, and other income sources. For most people in reasonable health and a tolerable position: the math strongly favors working longer. Use the calculators on this site to model your specific pension at different retirement ages and see the lifetime income difference in dollar terms before making the decision.