Author Topic: Early Retirement Effect on SS  (Read 1281 times)

martyconlonontherun

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Early Retirement Effect on SS
« on: October 09, 2017, 03:55:25 AM »
So I keep reading that the social security calculation will be impacted by FIRE by adding $0s in the non-working years. I''m looking through the calculation and trying to figure it out what each missed year would cost a FIRE candidate.

Say salary for an extra year is $100k. Do you max out at somepoint? The calculation I saw only said 15% of salary above a certain amount.

So total lost due to FIRE is $100k/35= 3K at 15%=  ~$425 a year in forgone social security per year retired * (35-Years worked)

So say you retire at 50 and only have 27 years of high income. That's 8 years with $0s (or immaterial amount from hs/college jobs) and 20 years of SS (66 to 86)

So the total loss of SS is ~$80,000, or (looking at it another way) each year worked gets you another $10k in SS.

Does my math make sense? Just trying to quantity an opportunity cost by retiring early. Hopefully if you are retiring before 55, you aren't relying on SS but is still a nice little blanket.

moonpalace

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Re: Early Retirement Effect on SS
« Reply #1 on: October 09, 2017, 04:48:26 AM »
I think you can do the actual math on the SS website.

slappy

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Re: Early Retirement Effect on SS
« Reply #2 on: October 09, 2017, 06:05:03 AM »
I think you can do the actual math on the SS website.

I've heard this too, but I have yet to be able to find the place to do it. I think you have to actually call SS and have them do the calculation with $0 earnings for the remaining years.

McStache

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Re: Early Retirement Effect on SS
« Reply #3 on: October 09, 2017, 06:15:51 AM »
You could use this one: https://www.ssa.gov/planners/retire/AnypiaApplet.html

Just pretend you started earning 20 (or however many) years earlier to see the general effect.

Monkey Uncle

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Re: Early Retirement Effect on SS
« Reply #4 on: October 09, 2017, 09:09:29 AM »
If you start at this page, the calculator will retrieve your actual earnings history so that you don't have to dig through your own records and type everything in.  It lets you choose an age when you'll stop working, so you can get a reasonable estimate of the impact of retiring early.

https://www.ssa.gov/retire/estimator.html
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nobody123

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Re: Early Retirement Effect on SS
« Reply #5 on: October 09, 2017, 09:11:48 AM »
https://www.ssa.gov/planners/benefitcalculators.html

If you use the "online calculator" you can enter your amounts to date and a fixed number for future years until your retirement date.  So, if you say you are going to retire at 55, it will stop the fixed amount contributions at that age and calculate your benefit at age 62.

chasesfish

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Re: Early Retirement Effect on SS
« Reply #6 on: October 09, 2017, 09:14:08 AM »
Most of the people planning for a significantly early retirement (50 or earlier) have almost no plans for using Social Security.  I could hash out the 100s of reasons why, but I think Mrs. ONL summed it up nicely in a blog post released today:

https://ournextlife.com/2017/10/09/social-security/

One point I'll make - The government has been stretching out the "trust fund will run out" timeline by increasing the cap that social security earnings are taxed much faster than when benefits accrue.  There's also a deal to be made on means testing higher income folks in retirement.

I expect my SS will get hit hard when I retire at 36.  I'll only have 20 working years into the system and only 8 contributing to the FICA tax maximum.
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seattlecyclone

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Re: Early Retirement Effect on SS
« Reply #7 on: October 09, 2017, 09:27:10 AM »
There's a PDF here that has the full formula that you can look at to work through the numbers yourself.

In a nutshell, the way the formula works is that you first scale up all of your earnings in previous years for inflation. Then you take the top 35 years (including zero-earning years, if applicable) and add them up. Then they have you divide that into a monthly amount, your monthly average earnings for your top 35 years. There's a formula to convert this number into a monthly benefit.

The key thing here is that there are two "bend points" where once you get there, earning more money is less beneficial than before. They're kind of like tax brackets. The first one is at $885 of monthly earnings. Social security will replace 90% of your average income between $0 and $885 if you start collecting benefits at your "full retirement age". The next one is at $5,336, replacing 32% of your income between $885 and $5,336. Past $5,336, you only get 15% back per month.

That $885 number equates to $371,700 in lifetime inflation-adjusted earnings. Once you get there, retiring early has much less of an effect on your benefits. To get twice as much per month, you would need to earn an additional $1.05 million.

The key thing is to get your ten years' worth of credits so that you get some benefit. Past that, working more just doesn't matter as much as you might expect.
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Catbert

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Re: Early Retirement Effect on SS
« Reply #8 on: October 09, 2017, 11:12:01 AM »
it won't impact as much as you may think.  Justin at Root of Good as a detailed analysis:

http://rootofgood.com/early-retirement-social-security/

I think Go Curry Cracker also has several posts on SS although I'm too lazy to look it up.
« Last Edit: October 09, 2017, 11:19:06 AM by Catbert »

NaturallyHappier

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Re: Early Retirement Effect on SS
« Reply #9 on: October 09, 2017, 05:33:43 PM »
To accurately crunch the numbers use this downloadable calculator.

https://www.ssa.gov/OACT/anypia/download.html

It allows you to model just about any scenario, but it is not that intuitive.  It took me a while to understand it.  First I put in all my a data to see if I could match the results of the online calculator for a normal (not early) retirement.  Once I had it producing the same numbers I modified the settings to not project future earnings and entered no income after the year I planned to retire to get my monthly projected income. 

Remember that all the calculators give the monthly income in today's dollars.

Monkey Uncle

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Re: Early Retirement Effect on SS
« Reply #10 on: October 09, 2017, 06:29:45 PM »
Most of the people planning for a significantly early retirement (50 or earlier) have almost no plans for using Social Security.  I could hash out the 100s of reasons why, but I think Mrs. ONL summed it up nicely in a blog post released today:

https://ournextlife.com/2017/10/09/social-security/

One point I'll make - The government has been stretching out the "trust fund will run out" timeline by increasing the cap that social security earnings are taxed much faster than when benefits accrue.  There's also a deal to be made on means testing higher income folks in retirement.

I expect my SS will get hit hard when I retire at 36.  I'll only have 20 working years into the system and only 8 contributing to the FICA tax maximum.

While there is certainly cause for concern over the future of Social Security, I think you are being too pessimistic.  I'll be a little under 50 when I FIRE, and even if nothing is done to fix SS and the benefits end up getting cut by 25% across the board, SS will still be paying me a non-trivial amount of money.  People who have little or no savings will be screwed, of course, but for frugal middle-aged FIRE-ees, SS should still be a significant piece of a multi-income-stream strategy.
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nereo

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Re: Early Retirement Effect on SS
« Reply #11 on: October 09, 2017, 06:40:18 PM »
Most of the people planning for a significantly early retirement (50 or earlier) have almost no plans for using Social Security.  I could hash out the 100s of reasons why, but I think Mrs. ONL summed it up nicely in a blog post released today:

https://ournextlife.com/2017/10/09/social-security/

One point I'll make - The government has been stretching out the "trust fund will run out" timeline by increasing the cap that social security earnings are taxed much faster than when benefits accrue.  There's also a deal to be made on means testing higher income folks in retirement.

I expect my SS will get hit hard when I retire at 36.  I'll only have 20 working years into the system and only 8 contributing to the FICA tax maximum.

While there is certainly cause for concern over the future of Social Security, I think you are being too pessimistic.  I'll be a little under 50 when I FIRE, and even if nothing is done to fix SS and the benefits end up getting cut by 25% across the board, SS will still be paying me a non-trivial amount of money.  People who have little or no savings will be screwed, of course, but for frugal middle-aged FIRE-ees, SS should still be a significant piece of a multi-income-stream strategy.

I'm not sure that the discussion above was intended to mean SS might not be there (e.g. overly pessimistic). The bottom line is that for those planning for early retirement in their 40s or 30s, SS becomes less relevant.  It's not because those ERs are assuming they'll never get anything from SS (they almost certainly will), but rather that with several decades of retirement before "full retirement age" the presence (or absence) of SS won't change their FI number.  SS just becomes an added and distant security blanket, but its far less of a factor in planning if you're 20 years out.
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maizeman

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Re: Early Retirement Effect on SS
« Reply #12 on: October 09, 2017, 06:55:31 PM »
Assuming you're going to work less than 35 years in total, you can approximate the social security value of additional income like this:

For your first $370,000 of lifetime earnings,* each ~$40 you make translates to one extra dollar of annual social security income.
For the next $1.85M of lifetime earnings,* each ~$110 you make translates to one extra dollar of annual social security income.
For any lifetime earnings after that point it takes ~$230 of new earnings to add one extra dollar of annual social security income.

*Adjusted for inflation, excluding income above the social security tax withholding cap.
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rpr

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Re: Early Retirement Effect on SS
« Reply #13 on: October 10, 2017, 01:56:48 AM »
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Eric

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Re: Early Retirement Effect on SS
« Reply #14 on: October 11, 2017, 04:43:34 PM »
I've yet to read a better article than this Kitces post from a couple of months ago:

https://www.kitces.com/blog/calculating-how-much-projected-social-security-benefits-statement-reduced-for-early-retirement/
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moof

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Re: Early Retirement Effect on SS
« Reply #15 on: October 11, 2017, 05:06:09 PM »
I think you can do the actual math on the SS website.

I've heard this too, but I have yet to be able to find the place to do it. I think you have to actually call SS and have them do the calculation with $0 earnings for the remaining years.

Go to ssa.gov.  Follow the retirement estimator links and fill in your data.  You will get monthly payouts for 62, 67, and 70.  You can then "Add New Estimate" right below the table and put in a different age, say 47.  It will give you a new age 62 estimate, which will be reduced by the same percentage as the 67 and 70 year numbers would be if you retired at 47 and waited till those ages.  Sadly there is no ability to tell it both the planned retirement age and planned withdrawal age independently.

In my case I lose about 14% by not working the extra couple decades.  YMMV.
« Last Edit: October 11, 2017, 05:13:28 PM by moof »

rpr

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Re: Early Retirement Effect on SS
« Reply #16 on: October 12, 2017, 02:05:32 AM »
I was curious so I made a Google Spreadsheet to calculate SS amounts when retiring early. It works for my case and a couple of others.

https://docs.google.com/spreadsheets/d/1ePoYq_X7S4_g252gak_zl_3k1BWf-KEIyiEK7t-X7VI/edit?usp=sharing

You should be able to make a copy and change the numbers for your particular situation.

I'd be happy if others tried it. Let me know if you have any questions, comments, or other suggestions.


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Re: Early Retirement Effect on SS
« Reply #17 on: October 12, 2017, 02:29:04 AM »
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martyconlonontherun

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Re: Early Retirement Effect on SS
« Reply #18 on: October 12, 2017, 02:34:57 AM »
I was curious so I made a Google Spreadsheet to calculate SS amounts when retiring early. It works for my case and a couple of others.

https://docs.google.com/spreadsheets/d/1ePoYq_X7S4_g252gak_zl_3k1BWf-KEIyiEK7t-X7VI/edit?usp=sharing

You should be able to make a copy and change the numbers for your particular situation.

I'd be happy if others tried it. Let me know if you have any questions, comments, or other suggestions.

Thanks.

A couple questions:
1. Does the number of years you plan on working just use your current salary plus small COL raises?
2. What does Aime mean?
3. Might also be nice to have year payments as well, since a lot of planning is done on expenses for the year.

rpr

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Re: Early Retirement Effect on SS
« Reply #19 on: October 12, 2017, 02:40:50 AM »
My answers are in blue


Thanks.

A couple questions:
1. Does the number of years you plan on working just use your current salary plus small COL raises?

That is roughly correct. The amounts are in 2016 dollars.


2. What does Aime mean?

AIME is Average Indexed Monthly Earnings. This is used to calculate the SS benefit.

3. Might also be nice to have year payments as well, since a lot of planning is done on expenses for the year.

Can you clarify what you mean?


martyconlonontherun

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Re: Early Retirement Effect on SS
« Reply #20 on: October 12, 2017, 02:57:47 AM »
My answers are in blue


Thanks.

A couple questions:
1. Does the number of years you plan on working just use your current salary plus small COL raises?

That is roughly correct. The amounts are in 2016 dollars.


2. What does Aime mean?

AIME is Average Indexed Monthly Earnings. This is used to calculate the SS benefit.

3. Might also be nice to have year payments as well, since a lot of planning is done on expenses for the year.

Can you clarify what you mean?


Just suggesting you add a formula to multiply the monthly calc by 12 to show yearly benefit. It's obvious math but one less calculation for those who are wondering what the yearly benefit would be. When i do my projections for expenses, I do it by year since some expenses are 1/2x a year.

Thanks

rpr

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Re: Early Retirement Effect on SS
« Reply #21 on: October 12, 2017, 03:12:03 AM »

Just suggesting you add a formula to multiply the monthly calc by 12 to show yearly benefit. It's obvious math but one less calculation for those who are wondering what the yearly benefit would be. When i do my projections for expenses, I do it by year since some expenses are 1/2x a year.

Thanks

Thanks for your suggestion. Makes sense. I have updated the sheet.

des999

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Re: Early Retirement Effect on SS
« Reply #22 on: October 12, 2017, 11:56:01 AM »
I've yet to read a better article than this Kitces post from a couple of months ago:

https://www.kitces.com/blog/calculating-how-much-projected-social-security-benefits-statement-reduced-for-early-retirement/

thanks for posting this link, I've read Kitces articles before and enjoyed them.  This one was no different, very informative.

I am going to be in the 15% replacement tier by the time I retire early, so it will have a very little affect on my amount I receive. 

honeyfill

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Re: Early Retirement Effect on SS
« Reply #23 on: October 12, 2017, 12:24:21 PM »
https://socialsecurity.tools/app.html


I found this tool. it uses actual numbers from the SSA and lets you play around with every scenario.