### Author Topic: Early Retirement Effect on SS  (Read 8053 times)

#### martyconlonontherun

• Bristles
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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

#### 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.

#### 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.

#### 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 »

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.

#### 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.

#### maizefolk

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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.

#### rpr

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

#### 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/

#### 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.

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.

#### rab-bit

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

#### 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.

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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• Posts: 675
##### Re: Early Retirement Effect on SS
« Reply #19 on: October 12, 2017, 02:40:50 AM »

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

• Bristles
• Posts: 366
##### Re: Early Retirement Effect on SS
« Reply #20 on: October 12, 2017, 02:57:47 AM »

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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• Posts: 675
##### 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

• Bristles
• Posts: 271
##### 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.

#### NaturallyHappier

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##### Re: Early Retirement Effect on SS
« Reply #24 on: October 18, 2017, 07:10:30 PM »
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.

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.

Great spreadsheet.  Much easier than the SSA tools.  Where did you find the index values in sheet 2?

#### rpr

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• Posts: 675
##### Re: Early Retirement Effect on SS
« Reply #25 on: October 18, 2017, 07:21:11 PM »
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.

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.
Great spreadsheet.  Much easier than the SSA tools.  Where did you find the index values in sheet 2?

Thanks. I got those from the following PDF link which was posted by seattlecyclone earlier in this thread: https://www.ssa.gov/pubs/EN-05-10070.pdf

#### sol

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##### Re: Early Retirement Effect on SS
« Reply #26 on: October 18, 2017, 07:52:08 PM »
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.

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.
Great spreadsheet.  Much easier than the SSA tools.  Where did you find the index values in sheet 2?

Thanks. I got those from the following PDF link which was posted by seattlecyclone earlier in this thread: https://www.ssa.gov/pubs/EN-05-10070.pdf

Keep in mind that those inflation wage adjustments need to be back-calculated every year.  The ER SS calculations I did three years ago aren't good anymore, and it's not just because I've added more years of wages.

As a general rule, SS is still hugely valuable for people on this forum who retire early.  From one of my old posts:

Quote
SS seems like a really good deal for early retirees.  Am I doing this wrong?

I've been reviewing the social security benefits calculator, which basically has three steps.

1.  Index your past wages for inflation up to today.  I'm ignoring this step, which makes these calculations a little conservative.
2.  Add up your total earnings for your highest 35 years of earnings and divide by 420 (is # of months in 35 years) to get your AIME.
3.  Apply the benefits formula to your AIME.  As of 2015, this formula pays you 90% of your first 826 of AIME and then 32% of AIME above 826 but below 4980.  Most mustachians won't exceed 4980.

Take a typical mustache family with two working parents who each make an average of 75k/year and who save 50% of their income for 15 years starting at age 23  Even if they only average 5% on their investments, they retire at age 38 with a nest egg of around \$1.7million which they hope will fund their \$50k/yr retirement expenses for 30 years (I'm assuming the other 25k is lost to taxes or work-related expenses.  This plan works out to about a 3% SWR, so they should be fine and are almost guaranteed to have money left over after 30 years.

At the end of their 30 year projected retirement period they are age 68 and have just about depleted their nest egg, and look to social security.  Using the above formula, they each have an AIME of (75k * 15)/420 = 2678.  At age 67 they will each be eligible for monthly social security payments of (.9*826) + (.32*(2678-826)) or \$1336/month, for a total annual social security income of over \$32k.  And that's a lowball estimate of current purchasing power, meaning it will be an even larger absolute number of dollars in the future, since all of your SS earnings are wage indexed in the future and we have already ignored the wage indexing for the past.

Even though this couple only worked for 15 years instead of the "recommended" 35 years to maximize social security benefits, they are still replacing over 60% of their retirement expenses just from social security income.  The system is weighted to pay a relatively higher income replacement rate to lower earners, and they have made themselves appear to be low earners by having so many years of zero earned income throughout their early retirement.  Their low expenses relative to their previous high incomes means that SS becomes a significant contributor to their household expenses at age 67.

I know most people discount social security payments as an additional safety margin.  I think having 60% of your household expenses covered from age 67 to death is more than a safety margin.

#### rpr

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##### Re: Early Retirement Effect on SS
« Reply #27 on: October 18, 2017, 08:19:21 PM »
sol -- Indeed, that is correct that the index factors would need to be updated every year.

You do make the great point that SS can replace a large portion of income needs when at full retirement age.

However, I always worry that somehow they will change the formula to  downweight the PIA due to the number of years of zero income. This could be done by applying something akin to the calculations for the WEP. In the case of the WEP, if you have less than 30 years of substantial earnings the factor for the first \$885 of AIME is decreased from the 90% to as low as 40% if less than 20 years of substantial earnings. (See https://www.ssa.gov/pubs/EN-05-10045.pdf).

#### NaturallyHappier

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##### Re: Early Retirement Effect on SS
« Reply #28 on: October 21, 2017, 06:20:06 PM »
Sol, Thanks for mentioning that this spreadsheet needs to be updated for each year.  That led me down the path of modifying the spreadsheet so that could be more easily accomplished.  I found that both the bend points and the index factors are base on the average wage index which is calculated for each year.  The average wage index does not change for that year once it is set, but the bend points and index factors do change based on the new average wage index for the year.

rpr, I hope you don't mind but I took the liberty of modifying your spreadsheet to make this easier to maintain.  I decided to combine the two sheets so that only one row needs to be added each year and it can be done without having to update references. I am calculating the bend points and the index factors now based on the average wage indexes.

This was a great exercise for me to learn this calculation.

#### MDM

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##### Re: Early Retirement Effect on SS
« Reply #29 on: October 21, 2017, 06:26:21 PM »

#### Paul der Krake

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##### Re: Early Retirement Effect on SS
« Reply #30 on: October 21, 2017, 07:42:08 PM »
sol -- Indeed, that is correct that the index factors would need to be updated every year.

You do make the great point that SS can replace a large portion of income needs when at full retirement age.

However, I always worry that somehow they will change the formula to  downweight the PIA due to the number of years of zero income. This could be done by applying something akin to the calculations for the WEP. In the case of the WEP, if you have less than 30 years of substantial earnings the factor for the first \$885 of AIME is decreased from the 90% to as low as 40% if less than 20 years of substantial earnings. (See https://www.ssa.gov/pubs/EN-05-10045.pdf).
I'm not too worried about the formula changing for a simple reason: the earning record of an early retiree looks a lot like that of stay at home parents, and nobody wants to see them destitute.

Now don't get me wrong, it's very, very, very likely that the formula will change, just like it's very likely that Congress will pass some laws that benefit you, and some laws that do not. In the past 10 years alone there have been quite a few, and trying to predict the next 30 years is foolish. I have no idea what 2047 USA will look like. But I think it's pretty safe to assume that the minimum benefit of Social Security won't change too much relative to a well-rounded retirement plan.

#### pecunia

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##### Re: Early Retirement Effect on SS
« Reply #31 on: October 22, 2017, 06:46:52 PM »
It's unusual to see the different take on Social Security.  I work with a guy who is 76 years old.  I read this forum and it all makes sense to me.  I ask him why he works.  He says, "I like to work."  He has a pension and a couple of houses.  He can certainly survive without working.

His advice is to work until 70 years old and then take Social Security.  At 62, you can take reduced dollars.  At present you will get 70 percent at 62.  I think 66 is 100 percent this year and you will receive 8 percent more until age 70.  You will still get Social Security if you work beyond 70, but I think (not sure) it will be considered taxable income.

I don't think too many of the folks here are interested in working until age 70.

I will be 62 next year, but I think I will save extra money to carry me until 66 and 4 months when I can receive full benefits.  We will simply bleed it dry to replace the SS every month.

As you get into your late fifties, they send out a sheet periodically listing your anticipated benefits.  Thanks for the calculation sheet.  I guess I can make my own spreadsheet as it doesn't look too hard.  The hard part will be digging out all my old income records for the past 35 years.  Although, I think that may also be on the SS site.  In fact, I think they will calculate it for you if you log on.

Reading all these posts in this forum has certainly convinced me that next year is the year to get FIRED.

#### MDM

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##### Re: Early Retirement Effect on SS
« Reply #32 on: October 22, 2017, 08:39:54 PM »
The hard part will be digging out all my old income records for the past 35 years.  Although, I think that may also be on the SS site.
Indeed they are.  Go to my Social Security and create your account if you haven't already.