Kitces on Social Security Benefits for Early Retirees

[Huskie87]

Michael Kitces is a very well respected blogger and researcher in the financial planning community.  Today he published an article discussing how retiring early impacts social security benefits.  It's worth a read for those that want to understand this topic further and for those who may be incorrectly using their projected social security benefits as an input for their FIRE decision.

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

[Catbert]

For those interested in the topic, Justin at Root of Good did an analysis also:

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

[Rosy]

Interesting articles - thanks for the link.

[kendallf]

I read those articles and, coupled with a few minutes to spare, was inspired to download my own earnings history and create a spreadsheet to calculate my benefit if I stopped after this year, along with some other data.  I have 33 years of earnings history right now, most of it reasonably well compensated, so I'm firmly in the 15% bracket of "returns" on further work.  Here are some notable facts:

My "projected benefit at Full Retirement Age" (assuming I continue at the same salary until age 67 and start receiving benefits then (17 more years):
$2706.  This is the number on the annual SS benefits statement, in today's dollars.

My calculated benefit at 67 if I quit working now, based on my work history to date, in today's dollars:
$2415. 

I'd have to work 17 more years at $100k+ per year to get $291/mo. in benefits.  No thanks!  I'm planning to continue working for about 5 more years (for other reasons!) and these years will result in about $35/mo. gains thanks to replacing some early years that were zero or close to zero.  After that it gets even worse..

I like the summary in RoG's article; make sure you have 40 quarters and can fill up the total earnings to the first bend point at 90%, which is currently $359k.  Not that much, and after that, the "ROI" is lousy.

[Paul der Krake]

Public Service Announcement

Set up a yearly calendar reminder to go to SSA.gov and check your earning history. Good luck finding paystubs and remembering what the hell you were doing 20, 30 years from now. Catch and fix discrepancies now if you see them.

Every time I've gone to a Social Security field office, there were elderly folks with despair in their eyes trying to figure out their situations. Don't be them. A guaranteed inflation-adjusted pension worth a couple hundred thousand dollars is too important not to keep tabs on.

[Bateaux]

Sorry to be the sceptic.  I've worked and payed into SS at one job or another for 30 years.  I'm 13 years away from the earliest date I could draw SS.  My advice, don't include it.  It's a bonus, inheritance, or gift to charity.  It's not live on money for the mustachioed.  Future legislation could tax it, means test it or outright eliminate it.

[Monkey Uncle]

I've been using the calculator that SS provides:

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

It allows you to input the age at which you plan to stop working, thereby avoiding the problem that Kitces was writing about.

[GenXbiker]

Sorry to be the sceptic.  I've worked and payed into SS at one job or another for 30 years.  I'm 13 years away from the earliest date I could draw SS.  My advice, don't include it.  It's a bonus, inheritance, or gift to charity.  It's not live on money for the mustachioed.  Future legislation could tax it, means test it or outright eliminate it.

SS is not a bonus, inheritance, gift, or charity, although you might think of it as those.  I consider it more of a mandatory retirement fund that I've paid into for decades.  Some people actually rely on it for their existence in retirement.  Depending on your income, it's ALREADY taxed, up to 85% of it is taxed as income by the federal government, and a number of states tax it as well.

I do not include it in my FIRE calculations because I have over a decade before I'll draw SS, so it won't even be available the first 8 to 10 years of FIRE, but I fully expect to get at least 70% of the promised benefit when I hit 62 (or whatever it might be raised to), but I expect to see cuts to the promised benefit amounts if it's not shored up one way or another.

[Mr. Green]

I view SS as the funds to cover any higher-than-expected medical expenses when we're older. Even if we don't get our currently projected amount, we're still going to get a healthy amount of money, easily enough to have it cover our medical costs.

[wenchsenior]

Sorry to be the sceptic.  I've worked and payed into SS at one job or another for 30 years.  I'm 13 years away from the earliest date I could draw SS.  My advice, don't include it.  It's a bonus, inheritance, or gift to charity.  It's not live on money for the mustachioed.  Future legislation could tax it, means test it or outright eliminate it.

SS is not a bonus, inheritance, gift, or charity, although you might think of it as those.  I consider it more of a mandatory retirement fund that I've paid into for decades. Some people actually rely on it for their existence in retirement.  Depending on your income, it's ALREADY taxed, up to 85% of it is taxed as income by the federal government, and a number of states tax it as well.

I do not include it in my FIRE calculations because I have over a decade before I'll draw SS, so it won't even be available the first 8 to 10 years of FIRE, but I fully expect to get at least 70% of the promised benefit when I hit 62 (or whatever it might be raised to), but I expect to see cuts to the promised benefit amounts if it's not shored up one way or another.

Social Security is the PRIMARY source of retirement income for just over 50% of retired couples and just under 74% of single retirees.   

IMO there is no way this program is going to be dismantled unless the whole country collapses. It would cause poverty and social upheaval like we haven't seen since the Great Depression if it were.   I agree that some means testing and a steeper benefit curve will likely by needed (more of the program resources directed to the lower earners, higher SS taxes, perhaps some slight adjustments to age of eligibility) to keep it viable.  But those adjustments will eventually be made, I am 99% sure.

[Jrr85]

Sorry to be the sceptic.  I've worked and payed into SS at one job or another for 30 years.  I'm 13 years away from the earliest date I could draw SS.  My advice, don't include it.  It's a bonus, inheritance, or gift to charity.  It's not live on money for the mustachioed.  Future legislation could tax it, means test it or outright eliminate it.

SS is not a bonus, inheritance, gift, or charity, although you might think of it as those.  I consider it more of a mandatory retirement fund that I've paid into for decades.  Some people actually rely on it for their existence in retirement.  Depending on your income, it's ALREADY taxed, up to 85% of it is taxed as income by the federal government, and a number of states tax it as well.

I do not include it in my FIRE calculations because I have over a decade before I'll draw SS, so it won't even be available the first 8 to 10 years of FIRE, but I fully expect to get at least 70% of the promised benefit when I hit 62 (or whatever it might be raised to), but I expect to see cuts to the promised benefit amounts if it's not shored up one way or another.

70% seems like a reasonably conservative assumption.  If nothing is done, everyone is projected to get around 74% I think.  If you have been a relatively high earner for a long time and therefore will look like a "have" when they start looking at places to cut, you might want to adjust it downward to account for getting hit for more than your fair share, but I would expect workers to get screwed before even well off retirees take more than 4-5% haircut on top of the 25% already built in (and really probably before they even take the 25% currently built in). 

But if you are looking at retiring at age 35-40 and are not planning on doing a semi-retired thing where you earn enough to top off your portfolio to ensure your assets continue to grow beyond inflation, a 0% assumption is probably more appropriate.  You're going to have to last so long before getting social security anyway, it'd be pretty tricky to plan on a draw down of your nest egg with the assumption that future SS payments will eliminate the draw down in the future; it' probably won't make a huge difference in what you need and will give you a good cushion for the uncertainty that can arise over 55-60 years.

[GenXbiker]

higher SS taxes, perhaps some slight adjustments to age of eligibility) to keep it viable.  But those adjustments will eventually be made, I am 99% sure.

Indeed, I'm 100% sure high SS taxes and age adjustments have been done before as well.

70% seems like a reasonably conservative assumption.  If nothing is done, everyone is projected to get around 74% I think.  If you have been a relatively high earner for a long time and therefore will look like a "have" when they start looking at places to cut, you might want to adjust it downward to account for getting hit for more than your fair share,

I had some leaner early years and will have some $0 earnings years in there if I retire at age 52 to 54.  I'm maybe around 3 times the first bend in the benefit curve.  Overall, I think I'm closer to mid-pack.

I don't factor in SS in my FIRE calculations despite fully expecting most of the benefit at 62, so it wouldn't upset my apple cart if I had to take a bigger haircut, but I feel 70%+ of the currently calculated benefit is a reasonable expectation.

[Bateaux]

I really hope to get some SS back when eligible.   Just don't plan on it.  Many in Congress would love to cut it.

[SwordGuy]

Most people just do not understand that high earners are HIGHLY subsidizing low earners when it comes to SS.

There are three income brackets that are provide benefits.   The high income bracket contains a 75% subsidy for low income folks.   So you're only getting benefits based on 15% of that bracket.  The middle-income bracket is about 10% better, if memory serves.

[Capsu78]

Public Service Announcement

Set up a yearly calendar reminder to go to SSA.gov and check your earning history. Good luck finding paystubs and remembering what the hell you were doing 20, 30 years from now. Catch and fix discrepancies now if you see them.

Yes, I usually do this in late April, just after the tax deadline, to make certain the figures match what I submitted (typically in late February).  You may want to wait a bit longer if you are a late filer.