I just had this conversation with a friend who is also considering early retirement and I think I am confused. If I go to the SS website and look to see what my benefit would be if I start taking at 62, it says I get $2163 per month. Are we saying that if I retire at 58 and do not earn wages for 5 years, my benefit will be reduced?

First, they inflation index every year of your earnings up to age 60. They take the highest 35 of those inflation adjusted earning years and average them to get average indexed monthly earnings (AIME), which serves as the basis for your primary insurance amount (PIA) calculation. If you retire before 60 (i.e. - stop earning), the calculator does not know to put zero for every year after you retire until age 60. Rather it assumes you will continue to earn at your last salary. You have to put the zeros in yourself. Note that indexing still continues on all the earnings years up to age 60. You don't get an inflation increase for the year you turn 61. Then the regular COLA applies to your PIA from the year you turn 62 on.

I have recommended this before, but somehow, no one really wants to do it. 1. Get your record of annual earnings from the social security website here

Review record of earnings 2. Here are the indexing factors as of 2022 year.

Average Wage Indexing (AWI) Series You can use the social security COLA for 2023 and 2024 to get a rough estimate of the indexing factors for the last two years. 3. Do the math to figure out your AIME by multiplying every year of earnings by the relevant indexing factors to get present dollars. Take the highest 35, or all of them if less than 35 (but add zeros to get up to 35 years). Average them and divide by 12. That's your AIME. 4. Then, calculate your PIA using your AIME. Absent unusual circumstances (like WEP), for 2024, you get 90% of the first $1174 of the AIME, plus 32% of the AIME between $1170 and $7078, plus 15% of the AIME over $7078 per month. The 90%, 32% and 15% thresholds are called the bend points. They change every year. Here is a table showing how they have changed

Benefit Formula Bend Points
The monthly PIA you calculate will be as of today and represents the amount you get if you take social security at your full retirement age (FRA). It will be COLA'd the year you turn 62 and thereafter. Now, you need to use your PIA to find out how much you get if you start before or after FRA. This tells you how to do that:

Early or Late Retirement The quick and dirty is that if you take at 62, you get 70% of what you would get at 67 (the PIA). If you wait until you are 70, your get 124% of the PIA amount.

This is all 8th Grade math and can quickly be done in Excel. I recommend that you try it, so that you will have a crystal clear understanding of how the system works.