Author Topic: Does early retirement affect social security if you wait until 70 to collect?  (Read 1792 times)

hydra

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What happens to your monthly social security in a case like this?

You retire in 2020 at 52.
You don't start collecting social security until 70.

Will the 18 years of not working between 52 and 70 affect your expected benefits?

Will it affect medicare benefits?

Suppose the earnings record looks something like the attached table, where 2018 and 2019 are similar to 2017.




 
« Last Edit: August 19, 2018, 12:06:01 PM by hydra »

secondcor521

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SS is based on the highest inflation-adjusted 35 years of an individual's earnings.

If I counted correctly, the person would have 36 years of earnings.  So for this person, their 2019 earnings would probably cause their 1994 earnings to drop out of the highest 35.  If they worked in 2020 and made a similar amount, then 1993 earnings would be replaced by 2020.  And so forth.

The monthly social security amount would therefore go up.  By how much is hard to say.  There are tools out there that one can download and enter in hypothetical earnings records to see the effect.

SS benefits don't "erode" or "decay" if one isn't working.  So it isn't so much the "not working" part as much as it is the "highest-35 average is lower than it would otherwise be".

I'm not sure on Medicare.  I'd expect that the person would qualify.  If they continue to work until 63, then their high salary would result in a higher Medicare premium at 65 (there's a 2 year delay).

Catbert

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It shouldn't affect Medicare which IIRC only requires 10 years of work.

Social security could be impacted if it means you have 0s for some of the 35 years that count or if you would have received raises above inflation which would have be substituted for lower income years.  That said the impact is likely less than you think.  Justin at Root of Good did a detailed analysis:

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

hydra

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Thanks! I think I get it.

You get credit for 90% of your average monthly income up to $895,
32% of any income between $885 and $5,397,
and 15% of income above $5,397

My monthly average in 2020 will be around 7600, which gets me around 2670 per month (adjusted for inflation) at 67.

If I were to work three additional high-earning years, for example, until I'm 55 and therefore delete the three lowest-earning years from the calculation, my monthly average would increase to around 9900.

After plugging these numbers into the algorithm, I get roughly an additional 350 month (2670 vs 3024) for three additional years of work. These numbers assume I start collecting at 67, not 70. I still don't know what my numbers would be if I wait until 70. I might be close to maxing out social security if I wait until 70 to start collecting because there's a pretty big jump from 67 to 70...

I hope my calculations are correct. I'm not a math person.

Thanks again!


lhamo

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MDM's case study spreadsheet has an awesome SS tab where you can plug in different scenarios and see how it affects your payment at different ages. On my phone so can't link easily.


DreamFIRE

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I hope my calculations are correct. I'm not a math person.


Your jump in benefits is about double mine when I replace zero income years with a similar monthly income as yours by working those extra years.

You should probably use the ssa.gov offline calculator that lets you put in the amount of income separately for each year, 0 income for the non-working years, and enter when you will draw benefits.

kpd905

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You need to make sure you adjust previous years using their index factor.

https://www.ssa.gov/oact/cola/awifactors.html

expatartist

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Thanks for posting this info, and great links! Since I've lived overseas for so long, I've not been paying into Social Security. At this point I need another year to pay into the system to reach ten years, and have considered working in the US for a few years eventually to top things up. The comments on Justin's post have some great ideas on how to do this strategically to maximize benefits.

MDM

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My monthly average in 2020 will be around 7600
That seems a little high for assuming no increase beyond 2016 for the Average Wage Index.

If one uses 128.4K, 135.6K, and 142.2K for 2018-2020 earnings, that gives $2,915,390 for the 35 highest years of indexed earnings, and an averaged indexed monthly earning (AIME) of $6,941.

Unless I fat-fingered a number or two - as lhamo noted, see the 'SocialSecurity' tab of the case study spreadsheet, and/or Social Security Calculator.


hydra

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I think the average monthly wage is calculated by summing the highest-earning 35 years and then dividing by 420 months (35*12). Is this correct?

So, yeah, I was wrong when I said my 2018 and 2019 would look a lot like 2017. I forgot that 2018 is going to have a big bump because a new stock grant begins vesting. (Of course all bets are off if we have a recession.)

Assuming no recession and my company stock remains elevated, my 35 years if I retire in two years might look like:

$310,000
$300,000
$267,986 <<< Lucky me, I got a job at a company with amazing stock
$173,769
$175,990
$162,059
$160,366
$133,563
$133,892
$121,498
$138,233
$183,487
$125,838
$116,796
$119,808
$85,049
$74,617
$69,133
$64,516
$66,689
$64,388
$49,526
$32,992 <<< First real job after devising a way to make money with my English degree  :-)
$15,440 
$7,221
$632
$1,565
$4,622
$8,671
$9,137
$4,432
$5,889
$7,516
$5,033
$1,180 <<<First job, Taco Bell


$3,201,533 / 420 = 7622

I used a Google sheet to calculate the sum, so I'm pretty sure it's right.

sol

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$267,986 <<< Lucky me, I got a job at a company with amazing stock

Are you paying social security taxes on your stock?  If it's a bonus or an equity sharing agreement, you normally don't.  Remember that for purposes of social security calculations, you only use the income on which you've paid social security taxes (normally box 3 on your W-2, not box 1).

MDM

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I think the average monthly wage is calculated by summing the highest-earning 35 years and then dividing by 420 months (35*12). Is this correct?
No.

Well, yes, but we have to define "highest-earning."  In the case of SS benefit estimates, as sol noted, "you only use the income on which you've paid social security taxes."  Thus, if you didn't pay 6.2% SS tax on the earnings, they don't count. 

In other words, you can't count any earnings above the Social Security Wage Base for that year.

Dragonswan

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In other words, the SS Salary cap is $128,400 this year.  Any year in which you made/make more than the salary cap, SS only includes the salary cap amount.  So this year, no matter if you make 310K, for SS purposes only 128,400 will count.  Once SS taxes have been taken out for 128,400, SS deductions stop and you will see your paycheck increase.  For calculating your benefit, only up to the salary cap (inflation adjusted) for that year will count.

There is no cap for medicare taxes.

secondcor521

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Also, each year's wages are inflation-adjusted - not sure what inflation rates they use, but ssa.gov can tell you.  That is done before you add them up and divide by 35*12.

Rather than reinventing the wheel, I'd really suggest you go to ssa.gov and use one of their calculators.  It'll be easier and much more likely to be accurate.  I think they even have a what-if tool.

katsiki

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My monthly average in 2020 will be around 7600
That seems a little high for assuming no increase beyond 2016 for the Average Wage Index.

If one uses 128.4K, 135.6K, and 142.2K for 2018-2020 earnings, that gives $2,915,390 for the 35 highest years of indexed earnings, and an averaged indexed monthly earning (AIME) of $6,941.

Unless I fat-fingered a number or two - as lhamo noted, see the 'SocialSecurity' tab of the case study spreadsheet, and/or Social Security Calculator.

MDM, or anyone else who knows: any idea why the socialsecurity.tools web site produces a different monthly SS payment than the SSA.gov web site?  I verified that it was the same year, etc.  Just curious as it is off by $400-500 per month.

MDM

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My monthly average in 2020 will be around 7600
That seems a little high for assuming no increase beyond 2016 for the Average Wage Index.

If one uses 128.4K, 135.6K, and 142.2K for 2018-2020 earnings, that gives $2,915,390 for the 35 highest years of indexed earnings, and an averaged indexed monthly earning (AIME) of $6,941.

Unless I fat-fingered a number or two - as lhamo noted, see the 'SocialSecurity' tab of the case study spreadsheet, and/or Social Security Calculator.

MDM, or anyone else who knows: any idea why the socialsecurity.tools web site produces a different monthly SS payment than the SSA.gov web site?  I verified that it was the same year, etc.  Just curious as it is off by $400-500 per month.
SSA.gov has more than one calculator.  The most accurate is Anypia.exe: Social Security Benefit Calculator.  That one requires year-by-year earnings and does not assume future earnings.

They have a shortcut calculator that does assume future earnings, so that could be the difference. 

The case study spreadsheet version matches anypia.exe, usually exactly but sometimes off by ~$1/month due to rounding.

katsiki

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Thanks @MDM !

I bet it is the future earnings..