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Effect of not working on Social Security
Old 07-14-2015, 12:15 PM   #1
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Effect of not working on Social Security

I have many years of paying into Social Security and certainly qualify for retirement benefits but that is many years down the road. What effect will years of zeros have on my benefits? In other words I will not be earning a paycheck and paying into SS for the next decade before age 65, I will be living off my company retirement and IRA's. Will years of not working reduce my benefits?
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Old 07-14-2015, 12:20 PM   #2
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Originally Posted by rocks911 View Post
I have many years of paying into Social Security and certainly qualify for retirement benefits but that is many years down the road. What effect will years of zeros have on my benefits? In other words I will not be earning a paycheck and paying into SS for the next decade before age 65, I will be living off my company retirement and IRA's. Will years of not working reduce my benefits?
Not if you were a high earner. In fact you get very little bang for a buck for a last decade in such case.
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Old 07-14-2015, 12:24 PM   #3
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It will affect benefits, if you do not have 35 years at the highest earning point. But it may not affect them much, particularly if you have a good number of high earning years. (In my case, earning less than 20K a year as an adjunct while raising kids looks to have had no substantial impact on my presently projected benefits--but YMMV, as might your definition of substantial!)

The IRS detailed Social Security calculator, available on this link, is one of the ways to calculate the impact of zero or minimal earnings years: Social Security Detailed Calculator
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Old 07-14-2015, 01:14 PM   #4
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A possible but unlikely negative, if you became disabled. Even if you have been paying medicare tax recently, unless you have ss tax payments recently, you would not be eligible for ss disability , and medicare as a disabled person, prior to 65. Other than that, as others have opined, not much difference.
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Old 07-14-2015, 02:13 PM   #5
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Not if you were a high earner. In fact you get very little bang for a buck for a last decade in such case.
I think, and somebody may correct me if I am wrong, that the larger salaries can push out the smaller salaries in earlier years, because the largest 35 years count. Most people have low salaries in their twenties and larger salaries in their fifties and sixties.
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Old 07-14-2015, 02:29 PM   #6
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Social Security benefits are based on your 35 best years, and they index those totals to inflation, rather than simply taking the raw numbers. For instance, if you earned $10,000 in 1975 and $30,000 in 2015, the $10K would actually pull more weight, because it would equate to around $50K in today's dollars.

Also, Social Security is designed to help poorer people more than richer, so once you get enough good years in, an additional good year won't help you all that much. Currently, SS is set up to cover:

a) 90 percent of the first $826 of average indexed monthly earnings, plus
b) 32 percent of average indexed monthly earnings over $826 and through $4,980, plus
c) 15 percent of his/her average indexed monthly earnings over $4,980.
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Old 07-14-2015, 11:13 PM   #7
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I think, and somebody may correct me if I am wrong, that the larger salaries can push out the smaller salaries in earlier years, because the largest 35 years count. Most people have low salaries in their twenties and larger salaries in their fifties and sixties.
I mean salaries that are sufficient to max out SS contributions. That type of salaries many professionals achieve by their early 30s. If you then max out SS till 55 that is all you need to be in a position where additional 10 years of working will not give you much in terms of higher SS.

I would say you max out your income in your 40's. At least this is how it works in Software Industry. By the time you are 55 you are glad to have a job .
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Old 07-15-2015, 12:43 AM   #8
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... Will years of not working reduce my benefits?
After years of wondering, I bit the bullet and downloaded the SS calculator, entered in my life earning record, and had the exact answer once and for all.

See: Social Security Detailed Calculator.

The usual caveat is that if one still has a decade or two to go until FRA, the calculated benefit is iffy because of the likelihood that it will get reduced when SS law changes. For someone in the late 50s, that money is closer within reach.
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Old 07-15-2015, 10:21 AM   #9
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If you want to manually calculate your Social Security yourself, get the document at:
http://www.socialsecurity.gov/pubs/EN-05-10070.pdf
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Old 07-15-2015, 11:15 AM   #10
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As others have mentioned, it won't change what you calculate with the detailed calculator, but be sure not to go by what you see in your annual statement. I believe that estimate assumes that you earn your current salary until FRA.
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Old 07-15-2015, 11:23 AM   #11
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Originally Posted by DEC-1982 View Post
I think, and somebody may correct me if I am wrong, that the larger salaries can push out the smaller salaries in earlier years, because the largest 35 years count. Most people have low salaries in their twenties and larger salaries in their fifties and sixties.
Absolutely right. The very best you can do is to hit the SS max for 35 years. If you have 35 professional years, it probably won't matter so much, but swapping a $20K year out for a $120K year still helps a bit. Do your own calcs with SS tools to see how much.

I ERd at 49 so I had some 0 years and some minimum or near min HS and college years and only about 17 years where I maxed out. I didn't bother to figure what an extra year would get me since a bit more SS isn't critical to me, but it probably wasn't insignificant.

To generically say it doesn't matter for a high earner can be very wrong for some people.
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Old 07-15-2015, 11:53 AM   #12
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Social Security benefits are based on your 35 best years, and they index those totals to inflation, rather than simply taking the raw numbers. For instance, if you earned $10,000 in 1975 and $30,000 in 2015, the $10K would actually pull more weight, because it would equate to around $50K in today's dollars.

Also, Social Security is designed to help poorer people more than richer, so once you get enough good years in, an additional good year won't help you all that much. Currently, SS is set up to cover:

a) 90 percent of the first $826 of average indexed monthly earnings, plus
b) 32 percent of average indexed monthly earnings over $826 and through $4,980, plus
c) 15 percent of his/her average indexed monthly earnings over $4,980.
I saw your post and had a senior moment of sorts. I did the math on this a few months back and looks like my factors are a bit dated? (816 vs 826). I believe this assumes one would work until 62 vs ER at 55. My AIME goes through 2014.





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Old 07-15-2015, 12:21 PM   #13
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To generically say it doesn't matter for a high earner can be very wrong for some people.
What happens to my Social Security benefit if I retire early?

If you care to collect few more percent more because you worked from 55 to 66 then go for it.

At that point high earner pays into SS so he/she can support payments for lower earning people. And there is nothing wrong with that, but it will not pay off as far SS benefits go

You get better pay off by waiting to collect SS at 70 then working your ass of in maybe last healthy decade of your life.
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Old 07-15-2015, 12:45 PM   #14
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There's definitely a diminishing return from the calculations I've run. Just using the quick calculator, if I was to quit working this year, at age 45, my estimated benefit would be around $1056 per month, at age 62.

Holding out another year raises it to $1096, a 3.79% increase. However, each following year sees a smaller increase, as the next year bumps it to $1136, or 3.65%.

By the time I'm 52, waiting until 53 only yields a 2.77% increase. There's a big drop after 55, though. 55 is a 2.63% increase over 54, but then 56 is only a 1.38% increase over 55. And then 57 is a meager 0.48% increase over 56. So it's definitely not linear.

I think that big drop off comes in because, for my parameters at least, age 57 is when the quick calculator gives me my 35th "good" year. It gives estimates of only around $2200-2600 per year for 1988-91, then jumps to around $22000 for 1992, and keeps rising after that. So, age 57 is the year that a "good" number forces the last one of those ~$2K years to drop off.

The next year, at age 58, does cause another low year to drop off, but the difference isn't as significant, as it's making a $22K year drop off, rather than a ~$2K year.

The benefit of waiting starts to show again at age 63, versus 62, where there's a 7.61% jump, but that's more a result from waiting an extra year to claim benefits, rather than working an extra year.
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Old 07-15-2015, 12:54 PM   #15
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Andre,

Those numbers you got make sense. You really need 20-25 good (high income) years and you will get very good SS benefits.

Additional 10-15 years of work will give you diminishing returns in the above case.
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Old 07-15-2015, 01:13 PM   #16
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Andre,

Those numbers you got make sense. You really need 20-25 good (high income) years and you will get very good SS benefits.

Additional 10-15 years of work will give you diminishing returns in the above case.
yeah, this is what we are looking at. DW will have 27 max years, and some zeros (or effectively so: $483, etc.). I will have 19 max years, with another 15 at 20K or so. When I looked at it last year, I was surprised at what we are projected to be getting. The incremental benefit to filling the 35 up was of no interest--even assuming no changes to the law.
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Old 07-15-2015, 01:47 PM   #17
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Once you get to into the third bend point it is really not worth the extra years.
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Old 07-15-2015, 09:58 PM   #18
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Once you get to into the third bend point it is really not worth the extra years.

There only two bend points, but yes.

I own a business, I shift my salary around now trying to skip SS taxes and avoid hitting the second bend point for as long as possible.


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Effect of not working on Social Security
Old 07-15-2015, 10:19 PM   #19
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Effect of not working on Social Security

There are three bend points. 90%, 32%, and 16%. Each one of those bend points is used to calculate your PIA. Which is derived from applying the three bend points to your AIME. Your AIME is figured by indexing your earnings, then averaging them over generally a 35 year span of your highest earnings. Then your AIME is applied to the three bend points. You receive 90% of your first (ranges are approximate) 0-818 dollars, 32% of your 819-4932, then finally 16% of your 4932+. This is why people commonly say once you hit the third bend point it's no longer worth it(or a similar saying). While yes, it may minimally increase your PIA, you still are earning those dollars. Just food for thought!


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Old 07-15-2015, 11:04 PM   #20
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The last bend point is 15%, not 16%, right? When I ERed at 45, I had a bunch of zeroes in the benefit calculation but because the reduced AIME was in that 15% bracket, I would see only a 11% reduction in monthly benefits. Not bad.
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