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
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%.
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.