Social Security Beneift Penalized by Early Retirement?

[more_or_less]

I have looked for an answer to this question but not found it here or elsewhere.

I've worked since my mid-20's and done OK -- paying pretty much the max into Social Security all my 30+ years of working.

If I "early-retire" now -- at age 57 -- and I don't work at another job until a I start taking Social Security when I am 67, will I be penalized for not working from the time I'm 57 to 67?

Thanks

 

[kaudrey]

Hi,

You can find all kinds of info at www.ssa.gov. I take this from the FAQs section of their website:

Q. I stopped work at the end of last year at age 52. I don't expect to work again before I start my Social Security benefits when I turn 62. Will I still get the same benefit amount you showed for age 62 on the Social Security Statement that you recently sent me?
A. Probably not. When we averaged out your 35 highest years of earnings to estimate your benefits on your Statement, we assumed you would continue to work up to age 62, making the same earnings you made last year. If, instead, you have $0 earnings each year over the next 10 years, your average earnings will probably be less and so will your benefit. You can use our Benefit Calculators to see how this will affect your monthly benefit amount.


If you work for 35 years, then it should be the same. If less, then a few years will be $0.

Hope this helps.
Karen

 

[Andre1969]

I dug around a bit and found this blurb...

The calculation looks at your entire earnings history with inflation adjustments, chooses the 35 best years and finds your average indexed monthly earnings for those years. Then it applies a formula that typically comes to somewhere between 25% and 45% of this inflation-adjusted average.

So basically, if you expect your income from ages 57 to 67 to be better than in the previous years, then yes, you will be penalized for retiring now. And you'd most likely have a much higher income in ages 57-67 than you did early on in your working life, so chances are you're going to give something up.

More info at: http://www.fairmark.com/retirement/socsec/pia.htm

 

[more_or_less]

Thank you for the info and the leads to more info. (I missed the ssa note.)

I guess I will need to use the tools and do a "what-if" calculation to see how much.

Thanks again!

 

[USK Coastie]

If you can retire on what you have what's the problem? If you have to trade 10 yrs of your life at w*^k to get an additional amount from SS is it worth it to you and your SO or can you bail now?

 

[cute fuzzy bunny]

I did a bunch of modeling and found that there are upper limits to the amount being paid out, and that although through wage increases (which are usually ahead of CPI adjustments) my earnings in my 50's and 60's might have produced a slightly higher benefit...but really not much.

Would be very different if your social security earnings throughout most of your life were very pedestrian, but I'm thinking that most people who make enough to retire early will have enough to qualify for something near to the maximum benefit.

Do make sure that you worked enough years to qualify for the benefits. SS will tell you, just request a social security statement be mailed to you. Besides, its a nice financial trip down memory lane to see how much you earned every year of your life...

 

[rs0460a]

is it worth it to you and your SO or can you bail now?

Agreed! Had this discussion with some folks that are waiting till year end to retire in order to capture a few month's credit on their retirement cash balance plan (probably will be about a $3-5K lump sum payment increase).

How much would you "pay" for a year of "freedom"?

- Ron

 

[Martha]

Go to the social security calculator here: http://www.ssa.gov/retire2/AnypiaApplet.html

Enter O for earnings for 2008, which will provide 0 earning for every year thereafter as well.

 

[MasterBlaster]

As a ballpark estimate, once you have the 40 quarterly credits then your SS benefit at full retirement age is reduced by around 1 percent for every year you don't work before you retire.

So, for example, a person who retires early at 50 will see around a 15% reduction in their benefit.

 

[jdw_fire]

I've worked since my mid-20's and done OK -- paying pretty much the max into Social Security all my 30+ years of working.

If I "early-retire" now -- at age 57 -- and I don't work at another job until a I start taking Social Security when I am 67, will I be penalized for not working from the time I'm 57 to 67?

If during your working life you paid the max amount into SS for 35 years then you will receive the maximum payout from SS when you start to collect. All wages are indexed to current levels. If you only have 34 years of paying into SS and they are all taxed to the max in then the payment SS sends you will be .15/35 = .43% less (yes that is 43 hundredths of a percent) then the max payout. So it didn't go down very much due to a shorter work life.

All that said the best way to see the effect on your own work history is to run SSA's calculator using your numbers.

 

[jdw_fire]

As a ballpark estimate, once you have the 40 quarterly credits then your SS benefit at full retirement age is reduced by around 1 percent for every year you don't work before you retire.

So, for example, a person who retires early at 50 will see around a 15% reduction in their benefit.

Actually this is not correct. The payment SSA sends you is affected by your wages while working and the number of years less than 35 that you work, not your age when you stop working. For example if someone started working & paying the max FICA when they were 15 yo and continued to do that until they were 50 yo and then stopped, they would receive the max SS payout when they start collecting at their full retirement age.

 

[Bikerdude]

Go to the social security calculator here: http://www.ssa.gov/retire2/AnypiaApplet.html

Enter O for earnings for 2008, which will provide 0 earning for every year thereafter as well.

What Martha posted will give you a quick estimate of what you will receive and take into account 0 future earnings. After several years of 0 earnings, your annual statement will give you an accurate estimate.

 

[Nords]

After several years of 0 earnings, your annual statement will give you an accurate estimate.

Well, actually the mailed statement does it after the first year of zero earnings... and the online calculator will do just about whatever you tell it to.

 

[ESRBob]

One of the big debate items a few years back was, after you'd stopped working and waited around for benefits to start, whether your benefits would continue to be inflation adjusted at the level of wage inflation or at the level of CPI (generally wage inflation has been about 1% higher). Anybody hear any more about this one?

I did some calculations last year and found that essentially working the extra years to get a little bit higher SS benefit was a really lousy way to increase your pension. It turned out that 30k put into a Vanguard inflation-adjusted annuity today would pay me the same amount as working 15 additional years and paying the ma into SS. So either you work a half year and use the money to buy an annuity or you work 15 paying into SS -- same pension benefit. Basically work the 15 years if you love your job or need the money, but don't keep working just to keep your SS payments up. Buy an inflation-adjusted annuity instead if you're worried, otherwise just join the ranks of the gainfully ER'd.

 

[Telly]

Take a look at this thread:

http://early-retirement.org/forums/index.php?topic=10860.0

 

[Bikerdude]

Well, actually the mailed statement does it after the first year of zero earnings...

The reason I said several years was that my statement has "not yet recorded" printed on the most recent years earnings line, so it may take 2 years to show your first 0 year. I agree they do the future calculation based upon the most recent years earnings (once it's recorded).

 

[Cb]

Here's what I've done several times in the past few years:

Go to the following SSA website:

https://s044a90.ssa.gov/apps6z/isss/main.html

...and at the bottom hit the button titled "Request a Social Security Statement"

Using that web form you can request one SS projection after another, changing only those fields you're interested in testing...such as retirement age and estimated future earnings.

I've do that for both my wife and myself, using retirement ages of now, next year, two years hence, etc for both of us. The bundle of SS projections will arrived in a few weeks.

I think that's easier and probably more accurate than downloading and installing the latet update of their application, then transcribing your career earnings into it to generate the same projections.

I reduce the age 62 projections by 25% before using them in FIREcalc...we're 46 & 47 and I think that's being pretty conservative given the speed at which our government works and the AARP's ever increasing clout.

Cb

 

[Shawn]

If I "early-retire" now -- at age 57 -- and I don't work at another job until a I start taking Social Security when I am 67, will I be penalized for not working from the time I'm 57 to 67?

The short answer is no. You will not be penalized for not working during the next 10 years. What this means is that the value of your previous Social Security contributions will not be directly impacted by what you do in the next 10 years. In your case, your benefit likely will be slightly higher if you do work but the difference will be small (and probably not worth 10 years of work).

Social Security benefits are calculate as follows (http://www.ssa.gov/pubs/10070.pdf).

Multiple the salary for each year of employment by the Index Factor (wage adjustment) for that year. Only use the salary up to the SS maximum. For example, if a person made $39,600 in 1985 (the SS maximum for that year), multiple this by the 2007 Index Factor for 1985, which is 2.20 ($39,600x2.20 = $87,120). This is the adjusted salary for 1985. Choose and sum the 35 years with the highest adjusted salaries. Divide by 420 (number of months in 35 years). This is the average adjusted monthly earnings in current 2007 dollars (the average over the 35 highest income years).

For example, if a person made the SS maximum for the last 35 years, the adjusted monthly salary would be $6841. Multiple the first $680 of the adjusted salary by 90%. Multiple the amount over $680 but less than or equal to $4100 by 32%. Multiple the amount over $4100 by 15%. The sum of these three values is the monthly SS income for a person retiring today at their full retirement age. In this case, it is $2117. For an individual who has worked 30 years, the monthly SS income would be only $100 less, or about $2017. However, since previous wages are indexed upward each year, these will correspond to the approximate monthly salary in today's dollars for a person who is 57 years old today, stops working, and starts to collect SS at their full retirement age in 10 years.

Should the 57 year old with 35 years of wages continue to work another 10 years? If they do, their average adjusted monthly salary (in today's dollars) 10 years from now will be greater because the SS maximum is higher today than it was 35 years ago. That is, the next 10 years will have more SS value than the first 10 years of their working career and will therefore replace the first 10 years when the highest 35 years are considered. But the amount isn't large. Making assumptions about the next 10 years, a person's average adjusted monthly salary in today's dollars might be $7470. Using the formula's above, their monthly SS income would be about $2212, or $95 higher than if they do not work the next 10 years.

In summary, for a person as described above who is 57 today and starts collecting SS at full retirement age (approximately, in today's dollars) ...

35 years: $2117 monthly income vs $2212 monthly income for 10 additional years of work
30 years: $2017 monthly income vs $2212 monthly income for 10 additional years of work

Not much difference.

The reason additional work is not very valuable in terms of SS monthly income is because: 1) the Index Factor for previous years is adjusted upward every year, meaning that your past wages maintain their relative value; and 2) for higher income individuals (those with 20 or so years at the SS maximum), the multiplicative value for each additional dollar contributed to SS is only 0.15 (as opposed to 0.90 or 0.32 for individuals with more modest incomes). It doesn't pay to work.

 

[albundyz]

I had a similar question posted on this board a short time ago

To summarize, basically, I will be retiring at age 56 (after exactly 35 years with megacorp). Since I don't plan to work for the next 6 years, I wondered if my benefits at age 62 would be reduced. I downloaded the calculator from the SSA.

When I ran the numbers, I found that I had a 3% reduction in benefits because I did not work the final 6 years. Another poster said I should have had a 6% reduction. Personally, I feel both 3% or 6% to be insignificant. I was glad it was not a 20% reduction.

I did not run the numbers for delaying SS for an older age like 66.

 

[more_or_less]

THANK YOU to everyone. This has been very helpful to me.

I used the SSA calculator that several people recommended and compared different what-ifs. I got the following result: my estimated annual payments at age 67 go down by about 1.5% if I stop working now.

This result is somewhat lower than suggested by several people here (who are probably correct) and it may be due to an error on my part in setting up the what-if cases. In any case, this sure does seem like a small enough amount that it is not something to worry about (now).

Again, thanks to all.