How Does Retiring Early Affect Your Social Security Benefits?

Many people are either leaving the workforce entirely or following alternative passions that result in a reduced income due to the Great Resignation over the past years, along with many others pursuing FIRE (Financial Independence, Retire Early). 

Because of how your benefits are determined, you might assume that these people are forgoing a disproportionate amount of Social Security benefits. Still, the situation is not as difficult as you might imagine. 

This is because your Primary Insurance Amount, which represents the amount of benefit you will receive at Full Retirement Age, is calculated by Social Security using “bend points” once your lifetime average earnings have been determined. 

Your Primary Insurance Amount (PIA) is Obtained by Adding Those Three Amounts from the Bent Point Calculations. 

In the case of an early retiree, Social Security will nevertheless average your earnings as if there were 35 years to compute when there are less than 35 years’ worth of earnings (for instance, 20 years) in your lifetime earnings record. Therefore, 15 years in our example will be zeros, which will undoubtedly lower your lifetime average. 

But it becomes clear that adding more years of high earning doesn’t always translate into a significant increase in Social Security payments because the weightings above are highest at the lower end of the average earnings range. You pay the same amount in taxes up to the annual taxation cap, but the benefit you receive as a result doesn’t rise as quickly. 

Let’s Go Over An Illustration 

John, who turns 60 this year, was ahead of the FIRE curve since he made enough money during his career to end his employment entirely at age 40 in 2002. In each of those 20 years, John earned the maximum amount of Social Security benefits; as a result, he has never contributed any taxes to the program since. His earnings after turning 40 have come from passive investments made using the significant salary he earned during his 20 years of employment. 

John qualified for a benefit of $2,596 under Social Security’s calculations if he waits until he reaches Full Retirement Age (FRA), which is 67. 

Just for fun, what would have happened if John had continued to get the high income up to this point? The calculation would yield an age-67 benefit for John of $3,377 if he earned at least the highest Social Security taxable amount for the entire 40 years. About $9,400 (about 30%) more per year, but John would have had an additional 20 years of waking up at 2 a.m. daily to prepare the doughnuts in exchange. I know this is an extreme case so let’s look at Brian, John’s identical twin brother, who made exactly $40,000 annually for the same 20 years. Brian is qualified for a Full Retirement Age payment of $2,141 if age 40 was the last year he worked. The extra years of earnings would only enhance his benefit to $2,661 if he claimed it at age 67 if he had continued working in that same position until his age 60 in 2022 (without receiving any wage raises; such is the fate of poor Brian). 

Again, in exchange for waking up at 3 a.m. for 20 more years to sweep the floor after his brother’s doughnut-making, this amounts to $520 extra per month ($6,240/year), or an increase of nearly 24 percent. 

Brian (and perhaps many FIRE supporters) didn’t achieve either of these goals; instead, in his 41st year, he opened his own bicycle business, which he has been running ever since. Making only around $20,000 a year was never as lucrative as his doughnut store mopping job, but it was sufficient to get by. When combined with the passive investment income that John has assisted Brian in arranging, Brian’s modest demands were met by this income, which was more than enough for him to live on. 

Brian is owed a Full Retirement AGe benefit of $2,453 per month, which is almost as much as John made with his extremely high salary over the course of 20 years, thanks to the additional 20 years of income he received through pursuing his passion in life. 

The moral of the story is that early retirement does affect your Social Security payout, but for many people, not as much as you may assume. Additionally, taking a partial retirement, such as pursuing a hobby as a “next chapter,” may not impact your Social Security as you may have been told. 

Contact Information:
Email: [email protected]
Phone: 9568933225

Bio:
Rick Viader is a Federal Retirement Consultant that uses proven strategies to help federal employees achieve their financial goals and make sure they receive all the benefits they worked so hard to achieve.

In helping federal employees, Rick has seen the need to offer retirement plan coaching where Human Resources departments either could not or were not able to assist. For almost 14 years, Rick has specialized in using federal government benefits and retirement systems to maximize retirement incomes.

His goals are to guide federal employees to achieve their financial goals while maximizing their retirement incomes.