Author Topic: Does living off investments reduce your social security benefit later?  (Read 3052 times)

meteor

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I am retiring at 55 to live off investments, but since I will no longer be paying social security (self-employment tax) will that have a negative effect on my benefits later?  I understand they add up "zero" for years you did not work and divide it to come up with the amount you receive.  If I've already paid into ss for 30 years.  If I pay zero for the next 15 years, will my benefits be based on the years I "didn't work?"

dragoncar

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Re: Does living off investments reduce your social security benefit later?
« Reply #1 on: February 25, 2014, 11:38:43 PM »
you should play around with the benefit calculator on the SS website.  In general, I'd say it will make little difference unless future working years are much higher salary than your current 35 year average.

edit: fixed the number of years
« Last Edit: February 26, 2014, 01:21:57 AM by dragoncar »

shuffler

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Re: Does living off investments reduce your social security benefit later?
« Reply #2 on: February 26, 2014, 01:11:34 AM »
This helped me understand it:  http://www.ssa.gov/pubs/EN-05-10070.pdf

I understand they add up "zero" for years you did not work and divide it to come up with the amount you receive.  If I've already paid into ss for 30 years.  If I pay zero for the next 15 years, will my benefits be based on the years I "didn't work?"
The link shows that they use the 35 highest-earning years of your working career.  So they'd only count 5 of those 15 years of zeros.

Also, notice the rate of payouts in Step 5.  The first $816 of (eligible and indexed) earnings pay back at a much higher rate (multiplied by 90%) than later tiers of earnings (32% and then 15%).  So there's a good chance that even if you worked for those extra 5 years, they'd only be contributing at the 15% tier, and wouldn't meaningfully affect your overall benefit.

But do run your numbers and see whether the extra 5 years would make a difference for you.

dragoncar

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Re: Does living off investments reduce your social security benefit later?
« Reply #3 on: February 26, 2014, 01:24:40 AM »
This helped me understand it:  http://www.ssa.gov/pubs/EN-05-10070.pdf

I understand they add up "zero" for years you did not work and divide it to come up with the amount you receive.  If I've already paid into ss for 30 years.  If I pay zero for the next 15 years, will my benefits be based on the years I "didn't work?"
The link shows that they use the 35 highest-earning years of your working career.  So they'd only count 5 of those 15 years of zeros.

Also, notice the rate of payouts in Step 5.  The first $816 of (eligible and indexed) earnings pay back at a much higher rate (multiplied by 90%) than later tiers of earnings (32% and then 15%).  So there's a good chance that even if you worked for those extra 5 years, they'd only be contributing at the 15% tier, and wouldn't meaningfully affect your overall benefit.

But do run your numbers and see whether the extra 5 years would make a difference for you.

Really good link.  I never really knew the math behind it before. 

edit:  I ran the numbers for me and will get an extra $87/mo (after age 65, todays dollars) for each additional year I work (above the SS cutoff).  This isn't amazing, but not insignificant either.

For the highest "return" on your SS investment, you should work long enough to have earned $342,720 in total SS-eligible earnings (in todays dollars).  Up to this point, you get the .9 multiplier.
« Last Edit: February 26, 2014, 01:46:30 AM by dragoncar »

soccerluvof4

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Re: Does living off investments reduce your social security benefit later?
« Reply #4 on: February 26, 2014, 03:52:29 AM »
Good Link....That answered alot of my questions as well. Thanks for sharing

PeteD01

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Re: Does living off investments reduce your social security benefit later?
« Reply #5 on: February 26, 2014, 08:15:54 AM »
For the highest "return" on your SS investment, you should work long enough to have earned $342,720 in total SS-eligible earnings (in todays dollars).  Up to this point, you get the .9 multiplier.

And the "second bend", from the .32 multiplier to .15, is at $2,065,400 SS-eligible earnings.
That is roughly $58,000 yearly gross income from work over 35 years.
Beyond that point it becomes a rather pricey insurance when compared with other annuities (unless one counts the employer contribution - then it doesn't look so great, but not too shabby either given spousal benefits and disability)

Peter