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How early retirement will impact my Social Security Benefit


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Last week, I wrote about my early retirement draw down strategy and there were some good discussions about Social Security in the comments. I didn’t know all the rules so I just used the $15,000/year average payout in that post. The post needs a follow up because it would be great to see how early retirement impacts my Social Security benefit. I did some research and wrote about this in my US News submission last week – early retirement will impact your social security benefit. I’ll take a look at my somewhat unique situation here in this post.

Social Security recap

1. You need 40 credits to be eligible for your Social Security benefit. You can earn up to 4 credits each year that you have earned income.

2. The benefit(PIA) is a function of your average indexed monthly earning (AIME.) This takes the highest 35 earning years and averages it out to a monthly earning.

3. The pay out or primary insurance amount is calculated using AIME.

  • 90% of the first $767 of AIME, plus
  • 32% of your AIME over $767 through $4,624, plus
  • 15% of your AIME over $4,624 up to maximum wage contribution
early retirement impact social security benefit

The benefit tapers off as you make more money.

Essentially, if your AIME over 35 years is around $4,624, you’ll get about 75% of the benefit already. You’ll have to double your AIME to $9,000 to get the last 25%.

Early Retirement

In my case, I quit my full time job at 39 and I don’t have 35 years of earnings yet. I checked my Social Security record and I have 20 years of earning and 15 of those years were near the maximum wage contribution (including 2011 and 2012.)

The AIME is calculated over 35 years and if I don’t earn any more money from now until I’m 67, then I will have $0 for 15 of those years.

So I went over to the social security online calculator to get a more accurate estimate of my benefit at full retirement age.

If I earn $10 every year from now on, my monthly benefit will be $1,677. I used $10 because if you put 0, they assume you passed away.

Social Security Benefit Projection

I made a table from my results

Future annual earnings Social Security benefit Comment
$10 $1,677 If I don’t “earn” any money from now until I’m 67.
$12,000 $1,838 This is what I’ll probably make with my online business and freelancing over the next few years.
$25,000 $1,972 If things go really well, perhaps I’ll earn this annually in the future.
$50,000 $2,142 Just for illustration.
$110,000 $2,595 This is if I continued working at my soul sucking job. I doubt I’d make it to 67 if I stuck with this option though.

As you can see, quitting the corporate job has a big impact on my social security benefit. Let’s assume things will go well and I’ll earn $25,000 annually in the future. If I had continued working as an engineer, my social security check would be 25% bigger. However, if we look at the dollars instead, we can see that the difference is $623 per month. Our passive income is already more than that right now. If we continue to invest and manage our rentals, then they will more than make up the difference. Those incomes are not “earned” and will not count toward social security.

Out of curiosity, I also calculated Mrs. RB40’s benefit assuming she’ll keep working until full retirement age. Her social security benefit will be around $2,000. This is because she took a couple of years off to volunteer for Peace Corp., worked part time during her graduate degree, and she got paid less overall. One reader suggested that perhaps I can take the spousal benefit (50% of Mrs. RB40’s benefit), but that doesn’t make sense with the current calculation.

In any case, Social Security is not doing well. If there are no reforms, then the benefit will be reduced. By the time I reach full retirement age, the benefit is projected to be reduced by 27%. That’s why I’m not counting on the Social Security check too much. If it’s there, we’ll use it for our fun money, but if not, we’ll be fine.  The $1,972 per month would go a long way toward a meandering round the world trip though. 😉


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{ 33 comments… add one }

  • William @ Drop Dead Money August 8, 2012, 3:54 am

    Not only is the amount getting reduced, the age at which it starts could change, too. Your attitude is probably the healthiest one: don’t count on it.

    Also keep in mind that the value of your investments/assets is affected by the economic cycle. Cycles in the recent past have all been 7-10 years in duration, bottom to bottom. You can get a significant jump by (once a decade) selling and buying. Depending on the severity of the downturn, you can add a 20-30% jump in value every cycle. Most importantly, you won’t get caught (like many did recently) where you have to liquidate at a down time.

    Wish I knew all this when I was you age… :)

    • retirebyforty August 8, 2012, 7:38 am

      I’m terrible at the whole economic cycle thing. I’ve been just adding into the investment regularly to take advantage of dollar cost averaging. However, now that I’ll invest less, I’ll have to be smarter about the economic cycle.

  • Lance@MoneyLife&More August 8, 2012, 6:53 am

    I personally don’t count on social security being around in its current form either. I don’t have plans to quit the corporate grind anytime soon but it is good to know I will need to forecast this to see how it will affect my potential retirement fun money!

    • retirebyforty August 8, 2012, 7:37 am

      I guess the younger you are the less you can count on. I’ll probably get less benefit and perhaps the full retirement age will rise a bit. We’ll see what happens when Washington deal with this.

    • Nurse Frugal August 8, 2012, 9:59 am

      I don’t plan on it being there either!! I expect to retire off of my own money! Social security was meant to be a supplement and people are now expecting it to be their entire means of retiring! Such a scary and unstable idea!!!

      • retirebyforty August 8, 2012, 4:13 pm

        That’s great to hear. Most readers agree with you.
        It’s too bad so many Americans have so little retirement saving. It’s a tough situation.

  • krantcents August 8, 2012, 7:00 am

    The glass is half full too. You didn’t pay much into it, but look at what you will receive. I have been out of the Social Security system for years because the school district pension scheme and self employment. The penalty is minor compared to what you can elsewhere. When I retire (again) I will be penalized because I receive a pension.

    • retirebyforty August 8, 2012, 7:35 am

      Can you get spousal benefit? My mother in law just retired from teaching and she is in the same situation as you. I haven’t look into how pension changes the calculation. Thanks for the info. I’ll look into that.

  • Mr. Everyday Dollar August 8, 2012, 7:12 am

    A really great exercise, thanks for sharing. I figure my taxable investment account will cover me from early retirement to “real” retirement at 60-something and perhaps beyond. My 401k will be an added bonus at “real” retirement and social security will be fun money, if the program is still around at that time.

    • retirebyforty August 8, 2012, 7:40 am

      No problem. That’s similar to what I’m doing. I’m doing some freelancing to help the taxable account. I don’t want to draw down too fast.

  • Financial Samurai August 8, 2012, 7:28 am

    Good stuff Joe! Can you clarify when you say you have 20 years of earnings? Does that mean your part-time jobs at under 20 years old counted?

    $1,600 is still nice bonus money!

    • retirebyforty August 8, 2012, 7:33 am

      Yes, any year that you had earning count toward the 35 years. I had a few years with around $3,000 earning.

      • Sam August 8, 2012, 7:22 pm

        Gotcha. So I guess I have 15 years then given my work in HS. I should just check my SD statement.

  • Kurt @ Money Counselor August 8, 2012, 7:39 am

    Very interesting. From what you’ve written, the ‘extra’ SS benefit you would have received had you continued with your corporate job until age 67 is a pittance compared to the toll doing so would have taken on you. One can’t buy good health. Not to be too grim, but Mrs. RB40 may well have been collecting SS survivor benefits 20 years from now if you hadn’t elected to make a change in your life!

    • retirebyforty August 8, 2012, 4:07 pm

      That’s the biggest reason why I left the old job. My health was getting worse and worse and that’s not the right way to live. More money isn’t worth that.

    • Steve August 8, 2012, 5:59 pm

      I wouldn’t call it a pittance, but working full time for 20 years would only raise your benefit by 50%. Hardly seems worth the effort – if you can live on the lower amount.

      On the other hand, the employer would also give you money directly, so maybe it’s not all that bad to have a day job.

      • retirebyforty August 9, 2012, 12:08 am

        A steady paycheck is definitely nice. :)

  • Jeff @ Sustainable Life Blog August 8, 2012, 8:13 am

    Interesting analysis joe – glad to know how this affects a persons social security. Do you still need to count rental properties as “income” and pay ss tax on them?

    • retirebyforty August 8, 2012, 4:08 pm

      Rental, interest, and dividend are not earned income and you won’t need to pay ss tax on them. Welcome back from your honeymoon. :)

  • SavvyFinancialLatina August 8, 2012, 9:34 am

    At 22 and with 43 years to go till “retirement” (65 years right?), I have a long way to go and I don’t think social security will be an option by that point. I’m not even counting on it. The money that goes out of my paycheck, unfortunately, I consider lost money, the cost of living in the America. Great article though! It definitely informed me about SS benefits. So now when older people talk about their SS benefits, I’ll know how it’s calculated.

    • retirebyforty August 8, 2012, 4:11 pm

      I’m sure social security will be reformed at some point. Our government might surprise you. :)

      • SavvyFinancialLatina August 8, 2012, 8:39 pm

        Well, if it is, it will be a nice surprise and I will consider it extra money. I’m not planning for it to be part of my retirement portfolio though. Plus by the time I “retire”, the government might have pushed the retirement age to 75 because we are living longer due to medical advances! LOL Although I wouldn’t want to live past 80.

  • 20's Finances August 8, 2012, 10:01 am

    This is an excellent illustration of retiring early – and I say that knowing some people may think I am a spammer. 😉 Between the two of you, social security and your rental income would cover almost all of your expenses without calculating inflation – and that’s not even touching your nest egg. That must feel pretty good!

    • retirebyforty August 8, 2012, 4:14 pm

      That does feel pretty good. :) Any extra money we get can go toward our travel fund.
      It’s still a long way until full retirement age so many things can happen, but I’m sure we’ll be all right.

  • Kim@Eyesonthedollar August 8, 2012, 10:05 am

    Thanks for the info. How in the world do they come up with those formulas? Like you, we will just use SS as a bonus and not count on it. My in-laws made some bad financial moves and are living solely on SS right now. It is a very meager existence. Best advice is to just be self sufficient.

    • retirebyforty August 8, 2012, 4:16 pm

      It’s good that it’s not linear. Well off earners need less help than low income earners.
      My in-laws have pensions so they are doing pretty well. :)

  • Darwin's Money August 8, 2012, 10:13 am

    Really cool analysis, thanks for putting this together. It gives me some perspective and we’re pretty close financially I think when it comes to past earnings, tenure and benefits, so I can see how various scenarios would play out if I took the same route. Funny “soul-sucking” term, that’s how many Americans feel!

  • Nick August 8, 2012, 10:51 am

    I’ve been struggling with what to do re: projecting my ss benefits. I’ve decided to aim for no social security with my projections, not because I’m a conspiracy theorist, but I’d rather be overprepared (and leave a bunch to my kids) than under. So this way I have the worst case covered. I’m almost 34, so a lot can happen between now and retirement age (whatever that will be when I hit my 60s…). :)

  • jefferson August 8, 2012, 1:58 pm

    Like many others, when considering my retirement.. I just assume that social security won’t be there… The solvency numbers that I have heard over the years lead me to believe that this is pretty much inevitable without major changes..

  • Ornella @ Moneylicious August 9, 2012, 1:47 pm

    It’s great that you looked into this. Social Security was not meant to replace your income. And based on the formula for calculating one’s Social Security benefit, the more money you make the less you actually received. Besides, with full retirement age increase to 67 (and it might further increase) that will be a little damper on retirement. All retirement account allow you access (penalty free) starting at age 59 1/2. There’s at least 7.5 years to wait until you can touch Social Security, and that’s under current law. Therefore, as you know, retirement and financial future’s success is completely on your shoulders.

    • retirebyforty August 9, 2012, 10:27 pm

      Social security was meant to work in tandem with personal saving and pension. Unfortunately, many people do not have either of those things. It’s a tough living if you have to depend on social security benefit alone.

  • Naomi June 11, 2013, 1:15 pm

    Are those benefit amounts in today’s dollars?

    • retirebyforty June 11, 2013, 10:30 pm

      They get a cost of living adjustment periodically. I’m not sure if this is reflected in the projected number. It’s all academic until you receive the benefit anyway. I’ll research a bit more. Thanks for pointing this out.

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