Author Topic: Figuring out how ER affects Social Security benefits  (Read 6913 times)

Nick_Miller

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Figuring out how ER affects Social Security benefits
« on: August 18, 2016, 04:50:00 PM »
Okay I was considering this and ran across this article...

http://money.usnews.com/money/blogs/on-retirement/2012/08/02/early-retirement-will-impact-your-social-security-benefit

So it looks like if you retire with fewer than 35 years of SS-taxed income, that SSA puts in a big fat ZERO for each year you are short when benefits are calculated. I don't know how to do the math on that, but at first glance, it appears that it would significantly slash benefits.

Has anyone run the numbers on this before FIREing? Right now I have 26 years of earnings. I'm at least 10 years out from retirement (and that's assuming we kick ass for the next decade), so I will have the 35 years, but if others worked only 10, 15, or 20 years, did you compare your estimated SS benefit earnings reports when you FIRED to the SS benefit earnings reports you received every year after FIRE? Did the estimated benefit just keep falling and falling with each "zero earnings year?"

seattlecyclone

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Re: Figuring out how ER affects Social Security benefits
« Reply #1 on: August 18, 2016, 05:01:22 PM »
Yes, zeroes are added if you didn't work for 35 years. No, it might not make as big of a difference as you would expect. The reason: social security uses a three-tiered system of translating your earnings to a monthly benefit. The first little bit of lifetime earnings is much more important than the next bit, which is more important than the last bit. See this worksheet walking today's 62-year-olds through the exact formula. Plug in your own earnings history to see how much your benefit might be if you were the right age to accept social security benefits today. Then run the numbers again without last year's earnings to see how much difference it makes. It probably won't be all that much.

Catbert

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Re: Figuring out how ER affects Social Security benefits
« Reply #2 on: August 18, 2016, 05:16:56 PM »
Justin @ Root of Good did the math for you:

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

The impact is much less that you might think.

MDM

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Re: Figuring out how ER affects Social Security benefits
« Reply #3 on: August 19, 2016, 12:22:04 AM »
If you don't want to write your own spreadsheet (or just want a template to start), see the 'SocialSecurity' tab in the case study spreadsheet.

You should be able to use that to answer your question for your particular situation.

boarder42

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Re: Figuring out how ER affects Social Security benefits
« Reply #4 on: August 19, 2016, 04:07:35 AM »
As stated it's a 3 tier system. Most of the money is already earned after 10 or so years. You're just helping fund our early retirement more by working longer and for that thank you.

poppan

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Re: Figuring out how ER affects Social Security benefits
« Reply #5 on: August 19, 2016, 05:32:02 AM »
I just figured mine out. Thanks for posting this as I had wondered in the back of my mind.

I'm 42 yo and if I stopped working now my benefit would be $1643.
If I worked another 25 years to full retirement age, my benefit would be $2800.

Basically for each additional year i work I would get an extra $46/month... kinda puts it in perspective!

andy85

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Re: Figuring out how ER affects Social Security benefits
« Reply #6 on: August 19, 2016, 06:44:48 AM »
Justin @ Root of Good did the math for you:

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

The impact is much less that you might think.
that was the best article on how SS is calculated that i have ever read. thank you so much. clears up a lot of confusion i had around the subject!

ender

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Re: Figuring out how ER affects Social Security benefits
« Reply #7 on: August 19, 2016, 06:56:11 AM »
Yes, zeroes are added if you didn't work for 35 years. No, it might not make as big of a difference as you would expect. The reason: social security uses a three-tiered system of translating your earnings to a monthly benefit. The first little bit of lifetime earnings is much more important than the next bit, which is more important than the last bit. See this worksheet walking today's 62-year-olds through the exact formula. Plug in your own earnings history to see how much your benefit might be if you were the right age to accept social security benefits today. Then run the numbers again without last year's earnings to see how much difference it makes. It probably won't be all that much.

The tl;dr of this is basically: take your total SS eligible career earnings, adjust them for inflation (they have multipliers) to get a number representing all your life's work and divide by 420. This gives you your "average monthly career earnings."

Using this monthly figure:

  • You get 90% of the first $856 in SS benefit
  • You add 32% of whatever more than $856, but less than $5157
  • You get 15% of whatever is above $5157

If you averaged $2k in monthly earnings, you'd get: 0.9*856 + 0.32*(2000 - 856) = about $1136/month. It requires $840k in career SS earnings ($2k/month * 420 months).


When you start putting numbers into the situation, you quickly realize that the overwhelming majority of the benefit is earned in your early years. Working the same salary I have now from age 40 through age 65 only increases my estimated SS benefit from $19k to $33k compared to quitting at 40.

jim555

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Re: Figuring out how ER affects Social Security benefits
« Reply #8 on: August 19, 2016, 07:42:12 AM »
Once you get past the second bend point (into the 15% band) additional work doesn't make that much of a difference.

neo von retorch

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Re: Figuring out how ER affects Social Security benefits
« Reply #9 on: August 19, 2016, 07:44:00 AM »
Have you created an account at SSA.GOV and reviewed your estimated benefits?

Can someone tell us if the estimated benefits the above site provides make assumptions about future work, or are based on "what you qualify for as of right now without any additional work?"

bludreamin

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Re: Figuring out how ER affects Social Security benefits
« Reply #10 on: August 19, 2016, 08:01:49 AM »
Have you created an account at SSA.GOV and reviewed your estimated benefits?

Can someone tell us if the estimated benefits the above site provides make assumptions about future work, or are based on "what you qualify for as of right now without any additional work?"

I created my account recently - It assumes you make the same salary as 2015 until traditional retirement age.

poppan

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Re: Figuring out how ER affects Social Security benefits
« Reply #11 on: August 19, 2016, 08:02:49 AM »
Have you created an account at SSA.GOV and reviewed your estimated benefits?

Can someone tell us if the estimated benefits the above site provides make assumptions about future work, or are based on "what you qualify for as of right now without any additional work?"

I have an account. The estimated benefits assumes you keep earning your current salary until you retire at full retirement age.

Nick_Miller

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Re: Figuring out how ER affects Social Security benefits
« Reply #12 on: August 19, 2016, 08:04:38 AM »
Have you created an account at SSA.GOV and reviewed your estimated benefits?

Can someone tell us if the estimated benefits the above site provides make assumptions about future work, or are based on "what you qualify for as of right now without any additional work?"

I just accessed mine the other day and it said benefit estimate was  "assuming you continue to earn (last year's salary)"

And great info, everyone!  I'm going to work on the spreadsheet and crunch my numbers this weekend.


The Happy Philosopher

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Re: Figuring out how ER affects Social Security benefits
« Reply #13 on: August 19, 2016, 08:18:46 AM »
My opinion: Getting to the first bend point is important, great return on investment. Getting to the second bend point is decent, but should not be a factor in whether or not you keep working. Anything past the second bend point is pretty minimal increase for the time worked.

The RoG article is excellent.

Simpli-Fi

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Re: Figuring out how ER affects Social Security benefits
« Reply #14 on: August 19, 2016, 11:54:49 AM »
From government site...I don't plan to work until I'm 62...but should still have taxable income.  That takes care of some of the 0's in my work history.

Retirement
You have earned enough credits to qualify for retirement benefits. At your current earnings rate, your estimated payment would be:

At full retirement age (67):
$2,855 a month

At age 70:
$3,541 a month

At early retirement age (62):
$1,998 a month

Your estimates are based on the assumption that you will earn $118,500 a year from now until retirement

neo von retorch

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Re: Figuring out how ER affects Social Security benefits
« Reply #15 on: August 19, 2016, 12:01:40 PM »
Here is a rough draft of an SSA spreadsheet calculator. I didn't see one in the excellent explanation article (even though he clearly made one!) so I made my own.

+ Has SSA information back to 1951
+ Calculates your 62/67/70 payout
+ Change the calculation year to adjust for inflation
- Does not limit you to 35 months automatically
- Will need updated as 2015+ information becomes available

https://docs.google.com/spreadsheets/d/1EPZLRPtBivnDXAx1W1M6r4a12UNYzFENGFxaQ8unR0E/
« Last Edit: August 19, 2016, 12:32:21 PM by neogodless »

Simpli-Fi

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Re: Figuring out how ER affects Social Security benefits
« Reply #16 on: August 19, 2016, 01:10:54 PM »
Your estimates are based on the assumption that you will earn $118,500 a year from now until retirement
I leave the sweet spot in 2023 if I meet there assumption.  I think I just found my FIRE goal.

Goldielocks

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Re: Figuring out how ER affects Social Security benefits
« Reply #17 on: August 19, 2016, 01:51:21 PM »
I just figured mine out. Thanks for posting this as I had wondered in the back of my mind.

I'm 42 yo and if I stopped working now my benefit would be $1643.
If I worked another 25 years to full retirement age, my benefit would be $2800.

Basically for each additional year i work I would get an extra $46/month... kinda puts it in perspective!

Canadian perspective -- I am 44 and have 22 years of full credits, and my CPP is only $630 per month, if I quit contributing now and start taking it at normal age 65.   

Plus Old Age Security of maximimum $573, which is different program, based on citizenship, and clawed back starting at $72k per year income, to $0/month at $117k in income.

zephyr911

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Re: Figuring out how ER affects Social Security benefits
« Reply #18 on: August 19, 2016, 02:05:03 PM »
Solution: pad the stash with a few extra dollars so you don't have to count on any SS. I'm sort of glad that I was exposed to so much hysteria about SS going bankrupt when I was a kid... it made me plan to never need it, which makes all my planning simpler. If and when I get it, I'll either splurge on younger generations of my family, or just give away more to my pet causes.

poppan

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Re: Figuring out how ER affects Social Security benefits
« Reply #19 on: August 19, 2016, 02:21:46 PM »
I just figured mine out. Thanks for posting this as I had wondered in the back of my mind.

I'm 42 yo and if I stopped working now my benefit would be $1643.
If I worked another 25 years to full retirement age, my benefit would be $2800.

Basically for each additional year i work I would get an extra $46/month... kinda puts it in perspective!

Canadian perspective -- I am 44 and have 22 years of full credits, and my CPP is only $630 per month, if I quit contributing now and start taking it at normal age 65.   

Plus Old Age Security of maximimum $573, which is different program, based on citizenship, and clawed back starting at $72k per year income, to $0/month at $117k in income.

Thanks for sharing, always interesting to compare!

Note that in US version, your Medicare premiums come out of your Soc Sec check...

Paul der Krake

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Re: Figuring out how ER affects Social Security benefits
« Reply #20 on: August 19, 2016, 02:26:32 PM »
tl;dr: get your 40 credits and don't look back.

woopwoop

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Re: Figuring out how ER affects Social Security benefits
« Reply #21 on: August 19, 2016, 02:52:11 PM »
tl;dr: get your 40 credits and don't look back.
Wow, didn't realize you needed ten years of earnings to get the minimum for ANY ss benefits. Good to know!

MDM

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Re: Figuring out how ER affects Social Security benefits
« Reply #22 on: August 19, 2016, 03:21:35 PM »
Here is a rough draft of an SSA spreadsheet calculator. I didn't see one in the excellent explanation article (even though he clearly made one!) so I made my own.

+ Has SSA information back to 1951
+ Calculates your 62/67/70 payout
+ Change the calculation year to adjust for inflation
- Does not limit you to 35 months automatically
- Will need updated as 2015+ information becomes available

https://docs.google.com/spreadsheets/d/1EPZLRPtBivnDXAx1W1M6r4a12UNYzFENGFxaQ8unR0E/

Nice!

I took a look but didn't understand why there would be an Average Wage Index of 700,000 in 2011...?

Are your results close to what is in the 'SocialSecurity' tab in the case study spreadsheet?  There are some scenarios from ssa.gov there if you want to use those for test purposes also.

Spork

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Re: Figuring out how ER affects Social Security benefits
« Reply #23 on: August 19, 2016, 03:28:01 PM »
Solution: pad the stash with a few extra dollars so you don't have to count on any SS. I'm sort of glad that I was exposed to so much hysteria about SS going bankrupt when I was a kid... it made me plan to never need it, which makes all my planning simpler. If and when I get it, I'll either splurge on younger generations of my family, or just give away more to my pet causes.

This was my situation exactly.  If I get it, then I get unexpected bonus beer money.

...but I have always wondered what all the "zeros" would do for me.  Now that I've seen the formula, maybe I'll see if I made it to the second bend.

Paul der Krake

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Re: Figuring out how ER affects Social Security benefits
« Reply #24 on: August 19, 2016, 03:39:49 PM »
tl;dr: get your 40 credits and don't look back.
Wow, didn't realize you needed ten years of earnings to get the minimum for ANY ss benefits. Good to know!
To nitpick a little, you need 10 years for the retirement benefits of Social Security. The disability and survivor benefits are subject to different rules.

seattlecyclone

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Re: Figuring out how ER affects Social Security benefits
« Reply #25 on: August 19, 2016, 05:00:32 PM »
tl;dr: get your 40 credits and don't look back.
Wow, didn't realize you needed ten years of earnings to get the minimum for ANY ss benefits. Good to know!

Yep, this is true. Technically you need 40 "quarters of coverage" (or "credits"). You get one for every $1,260 you earn (this varies with inflation), maximum four per year. If you happen to ER a little bit shy of 40, it's not that hard to get there. Find a half-time job for $12/hour, work there for six weeks, and you earn more than enough for one credit. Surely there's something in your town that you would be interested to try for a little while and would pay you at least that much.

seattlecyclone

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Re: Figuring out how ER affects Social Security benefits
« Reply #26 on: August 19, 2016, 05:02:49 PM »
And with the disability benefit you have to have worked and paid into SS in the 10 years prior to your claim or you get nothing g even if you've reached your 40 credits. So if you RE at 40 and then become disabled at 51(maybe with newly incurred medical bills) you can't get SS disability. May be a way around it.
For ALL ten years, or for some of them? Withdrawals from taxable accounts don't count as working, right?

Sorry, I am still thirty years away from "retirement age" so I never thought much about this, but maybe I should. I calculated out my expected benefits, and it would be $2800 if I kept working at this level, $750 or so if I quit this year and like $900 if I continue to work and make like $20k a year part time. I'm still going to quit, but that's a bigger difference than I expected.

You need to have earned 20 credits in the past ten years, meaning you earned at least ~$5,000 in at least five of the past ten years.

woopwoop

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Re: Figuring out how ER affects Social Security benefits
« Reply #27 on: August 19, 2016, 06:09:48 PM »
If you happen to ER a little bit shy of 40, it's not that hard to get there. Find a half-time job for $12/hour, work there for six weeks, and you earn more than enough for one credit. Surely there's something in your town that you would be interested to try for a little while and would pay you at least that much.
Of course, that's a super easy requirement to fulfill; I was just ignorant that it was even a requirement. My family lived off of Social security when my dad died, so I'd want to be sure that if anything happens to me, my family wouldn't get screwed over because I didn't do a few weeks of tax-paying work every year. Good to know, thank you all for the info!

ender

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Re: Figuring out how ER affects Social Security benefits
« Reply #28 on: August 19, 2016, 06:12:53 PM »
If you happen to ER a little bit shy of 40, it's not that hard to get there. Find a half-time job for $12/hour, work there for six weeks, and you earn more than enough for one credit. Surely there's something in your town that you would be interested to try for a little while and would pay you at least that much.
Of course, that's a super easy requirement to fulfill; I was just ignorant that it was even a requirement. My family lived off of Social security when my dad died, so I'd want to be sure that if anything happens to me, my family wouldn't get screwed over because I didn't do a few weeks of tax-paying work every year. Good to know, thank you all for the info!

I think disability is easier to get and requires fewer quarters.

Simpli-Fi

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Re: Figuring out how ER affects Social Security benefits
« Reply #29 on: August 20, 2016, 12:11:38 AM »
Solution: pad the stash with a few extra dollars so you don't have to count on any SS. I'm sort of glad that I was exposed to so much hysteria about SS going bankrupt when I was a kid... it made me plan to never need it, which makes all my planning simpler. If and when I get it, I'll either splurge on younger generations of my family, or just give away more to my pet causes.
Come on man, no body reading this forum is depending on it, just making sure we expose it for all the free money it can get us.  That's like saying, don't max out 401k because the taxes are going to be retard when you with draw it.  I also have a pension that can be bankrupt when it's time to collect... Not depending on it but if they are offering free money I'm taking the best option

Spork

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Re: Figuring out how ER affects Social Security benefits
« Reply #30 on: August 20, 2016, 07:23:31 AM »
Solution: pad the stash with a few extra dollars so you don't have to count on any SS. I'm sort of glad that I was exposed to so much hysteria about SS going bankrupt when I was a kid... it made me plan to never need it, which makes all my planning simpler. If and when I get it, I'll either splurge on younger generations of my family, or just give away more to my pet causes.
Come on man, no body reading this forum is depending on it, just making sure we expose it for all the free money it can get us.  That's like saying, don't max out 401k because the taxes are going to be retard when you with draw it.  I also have a pension that can be bankrupt when it's time to collect... Not depending on it but if they are offering free money I'm taking the best option

Actually... read a few more threads.  People are computing FIRE down to the penny based on what SS they're expecting.  I've seen lots of "I can do 5% instead of 4% SWR because SS kicks in at age 65."  They'll *probably* be fine.  But I'd rather be a tiny bit more conservative.

Paul der Krake

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Re: Figuring out how ER affects Social Security benefits
« Reply #31 on: August 20, 2016, 07:59:13 AM »
Personally, I do not buy the "SS is going broke" alarmist crowd, but it would be unwise to assume that the rules will remain the exact same for the next 4 decades when I will start collecting. Plan and account for SS, but keep some flexibility. 40 years is a LONG time, even in the scale of government.

Like others have pointed out, it's dead easy to get a little bit of earned income every couple years when you are retired and your schedule is wide open. So go ahead and teach that kayak class or something. It can be fun AND provide a bit of hedging against a sudden rule change.

neo von retorch

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Re: Figuring out how ER affects Social Security benefits
« Reply #32 on: August 20, 2016, 08:17:25 AM »
https://docs.google.com/spreadsheets/d/1EPZLRPtBivnDXAx1W1M6r4a12UNYzFENGFxaQ8unR0E/

Nice!

I took a look but didn't understand why there would be an Average Wage Index of 700,000 in 2011...?

Are your results close to what is in the 'SocialSecurity' tab in the case study spreadsheet?  There are some scenarios from ssa.gov there if you want to use those for test purposes also.

I undid "Anonymous User" edits... and updated the Spreadsheet to View only (have to make a copy now.) Looks like the AWI calculations are the same. Couldn't dig into that sheet's formulas to go further with it, but yes, I think it should be comparable.

ETA: Main difference is that my results are in "today's dollars" while the spreadsheet gives you a much larger number (assuming you'll turn 67 in the future) with inflation adjusted dollars. Which works with the rest of the sheet (I assume it does everything with inflation included), while my spreadsheet is just a simpleton version :) Today's dollars. Which my simple mind find easier to comprehend.
« Last Edit: August 20, 2016, 08:34:54 AM by neogodless »

Roland of Gilead

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Re: Figuring out how ER affects Social Security benefits
« Reply #33 on: August 20, 2016, 08:26:29 AM »
SS will be there.  Mark this post and come back in 20 years to prove me wrong.

It might change a bit here and there, but if the USA is here, SS will be here.