Social Security Benefits When You've Retired Early

Does Social Security play any part in your calculations of projected retirement income? If you’ve included social security benefits, have you accurately estimated what those benefits will be? Especially if you plan on retiring from work early? For Americans, social security should probably be included in their calculations. But potentially at a lower amount than the estimates provided by the Social Security Administration (SSA). Let's look at why that is and how you can more accurately estimate those benefits.

How Does Social Security Determine Your Benefits?

Social security benefits are based on your highest 35 years of earnings, on a per month basis. The aim of the benefit is to replace your monthly income in the following increments (2018 numbers):

• 90% of your earnings up to $895
• 32% of your earnings between $895 and $5,397
• 15% of your earnings above $5,397 to the monthly maximum of $10,700

Therefore, if you had monthly earnings of $6,000, your projected benefit would be:

• 90% of $895 = $806
• 32% of $4,502 (5,397-895) = $1,441
• 15% of $603 (6,000-5,397) = $90

The grand total of your benefit from this month would be $2,337.  The SSA uses your highest 420 months to average out your earnings over your working career to calculate your benefit. Of course, these earnings are adjusted for inflation. Your earnings from 10 years ago aren’t worth what your current earnings are.

How Does Retiring Early Effect Your Social Security Benfits?

If you retire early you're likely to have a period of time in that 35-year period that you have zero earnings or at least very low earnings. That would mean that your record would have some zeros included in the average. To accurately estimate what your Social Security benefits would be in early retirement you must take this into consideration when doing your calculations. The statement of projected benefits produced by the SSA assumes that you will continue earning your current salary through retirement age, which likely will not be accurate. In my case, my social security statement shows expected benefits at age 67 of $2,546. But, given an early expected retirement date (full stop, zero future earnings), my social security benefits are projected to really be $1,161. Big difference huh?! The SSA has created a retirement benefits estimator which you can access here. Using this calculator, you can enter your entire earnings history plus a projected retirement date. You can't project out a reduced income in the future, but at least you can see what the impact of early retirement is.

Thanks For My Number, But Will Social Security Still Be There?

Many people have concerns about the viability of social security, especially for younger folks. Given the changing demographics of the country and the un(der)funded entitlements like Social Security, Welfare etc, there has been quite a bit of press coverage to the potential for Social Security going bankrupt. However, it will be a political nonstarter to stop social security--a more realistic outcome is a reduction of benefits. How should that affect your calculations? Well, based on the SSA’s own report:

The Trustees project that the combined OASDI Trust Funds will continue growing through 2021 as total annual income exceeds total annual costs. Beginning in 2022, however, they project the OASDI annual cost will exceed total income, so the trust fund reserves will be drawn down until they are depleted in 2034--the same year as estimated in the last two reports. After trust fund reserve depletion, continuing income would be sufficient to pay 77 percent of program cost, declining to 73 percent for 2091.

Given their projections, I would say that reducing your projected benefit from above by 25% would be a reasonable adjustment.

Great! But Should I Take Social Security Sooner Than Later?

Retirees have a lot of flexibility around when to claim their social security benefits. For those retiring now, the full retirement age (full benefits) is at age 66. However, you can claim early at age 62. You can also defer your benefit to age 70. Claiming early will significantly reduce your benefit and likewise delaying will dramatically increase your benefit.  Each year you take benefits early reduces your benefit by approximately 6.66% for a max of three years plus 5% for each year beyond three. For example, claiming at 62 instead of your full retirement age of 66 reduces your benefit by 25%. Delaying your benefit will increase your benefits by 8% per year. Claiming at age 70 instead of 66 would result in a 32% increase in monthly benefits. Needless to say, social security claiming strategy is a complex topic. To delve further into the other factors, including life expectancy, marital status, sources of income in retirement and investment assumptions, another post is required (and is forthcoming). In the meantime, let me know if you have any questions or comments about the amount you expect to receive in your social security benefit! Once again, I have to give a nod to Michael Kitces who discusses these points, but goes further to strategize about continuing to work if your wages are increasing vs decreasing and income replacement rates.