When you’re planning for retirement, one critical question is: Should Social Security be part of your projected retirement income?
For most Americans, the answer is yes—but with caution. If you’re considering early retirement, you may need to estimate your benefits at a lower amount than the Social Security Administration (SSA) suggests. This guide explains how Social Security benefits are calculated, how early retirement affects them, and why you may want to plan for reduced payouts.
How Social Security Benefits Are Calculated
Social Security benefits are based on your highest 35 years of earnings, calculated on a monthly basis. The SSA’s goal is to replace a percentage of your monthly income in three tiers:
(Example figures from 2018 SSA Bend Points)
- 90% of your average monthly earnings up to $895
- 32% of earnings between $895 and $5,397
- 15% of earnings above $5,397, up to the monthly maximum of $10,700
Example Calculation
If your average monthly earnings were $6,000, your benefit calculation would look like this:
- 90% of $895 = $806
- 32% of $4,502 (5,397 – 895) = $1,441
- 15% of $603 (6,000 – 5,397) = $90
Estimated Monthly Benefit: $806 + $1,441 + $90 = $2,337
The SSA averages your highest 420 months of inflation-adjusted earnings to determine this figure.
How Early Retirement Affects Social Security Benefits
The “Zero Years” Problem
If you retire early, you may have several years in your 35-year calculation period with zero or low earnings. Those zeros reduce your average, lowering your monthly benefit.
The SSA’s benefit statements assume you’ll keep earning your current salary until full retirement age (typically 67). If you stop working earlier, that assumption inflates your projected benefit.
Example:
- SSA statement at age 67: $2,546/month
- Early retirement with zero future earnings: $1,161/month
That’s more than a 50% drop in benefits.
How to Get a More Accurate Estimate
The SSA offers a Retirement Benefits Estimator. With it, you can:
- Enter your full earnings history
- Set a specific retirement date
- See the impact of stopping work early
Tip: The calculator doesn’t allow projecting a reduced income before retirement age, but it’s still the most accurate way to factor early retirement into your plan.
Will Social Security Still Exist When You Retire?
The Funding Challenge
Concerns about Social Security’s solvency are common—especially among younger workers. Due to shifting demographics and underfunded programs, headlines often warn of “Social Security going bankrupt.”
However, complete elimination is highly unlikely. The more realistic scenario is benefit reductions.
What the SSA Projects
According to the SSA’s own Trust Fund 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, costs will exceed income, and reserves will be depleted by 2034. After that, ongoing income will cover about 77% of benefits, declining to 73% by 2091.
Key Takeaways
- Social Security should be factored into retirement income projections—but conservatively.
- Early retirement will reduce your benefits, sometimes significantly.
- Use the SSA’s tools to get a more realistic estimate.
- Plan for possible benefit cuts in the future by saving more now.
- Given current projections, reducing your estimated benefit by 25% is a reasonable adjustment.
Should You Take Social Security Early or Delay It?
Retirees have flexibility in when they claim benefits:
- Full Retirement Age (FRA): Currently 66 for those retiring now.
- Claim early at 62: Reduces your benefit by about 25% if your FRA is 66.
- Delay until 70: Increases your monthly benefit by about 8% per year past FRA—up to a 32% boost at age 70.
Reduction for early claiming:
- About 6.66% per year for the first three years before FRA
- About 5% per year for additional years before FRA
Increase for delaying:
- About 8% per year after FRA until age 70
Example:Claiming at 62 instead of 66 = 25% less per month. Claiming at 70 instead of 66 = 32% more per month.
The Bottom Line
Social Security is a valuable part of retirement income, but it’s not immune to reduction—both from early retirement decisions and possible future benefit cuts.
Plan with conservative estimates, consider delaying benefits if you can, and make sure personal savings and investments form the foundation of your retirement plan.
For more on the nuances of claiming strategies—including how marital status, life expectancy, and investment returns play into the decision—check out Michael Kitces’ analysis on projected benefits and claiming strategies.
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