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The end of SSA contributions
Old 09-16-2015, 10:10 PM   #1
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The end of SSA contributions

I'm wrestling with one more year, and I do have some financial goals besides retirement that will be most of the reason why I keep working.

But as this is my 35th full year of employment I've run the numbers to determine that my ultimate SS benefit will increase about half a percent as a result of this year's contributions. A lot of this is due to bend points and earnings history. If I work another year, I will pay a full year of SS tax, but increase my ultimate benefit by only 0.1% (one tenth of a percent). If I work for another year beyond that, I will again pay a full year of SS tax, and my benefit will increase half that - about 5/100th of a percent. It increases even less after that.

I've always told myself that paying that tax was really okay because it was supporting the system and partly earning me a future SS benefit. Going forward this shifts considerably and the tax is almost exclusively supporting the system and no longer earning me anything appreciable. Just like the partial years of earnings I had. They drop out of the top 35 calculation, so count as nothing.

Is this just incidental and not a factor for deciding when to FIRE? I guess it's not so ER anymore since I got the 35 full years, but it's still early compared to SS full retirement age. How much does this influence people's decision to ER or keep working?
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Old 09-17-2015, 12:50 AM   #2
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Yes, SS is unlike 401k, where a worker saving for 40 years gets a lot more than one saving for 20 years.

With SS, higher-paid and longer-working contributors subsidize for lower-paid and shorter-term workers. That's how it is designed to work.

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Originally Posted by growing_older View Post
Is this just incidental and not a factor for deciding when to FIRE? I guess it's not so ER anymore since I got the 35 full years, but it's still early compared to SS full retirement age. How much does this influence people's decision to ER or keep working?
No, it was not a factor for me. When I stopped working, what I missed was the before-tax savings in 401k, and the take-home pay. That's supposedly "my own" money, and I paid more attention to that. SS is really the "government's money" anyway, and they may change the benefits any time.

I did not sit down to figure out my SS benefits until much later. But once I did, same as you, I found out that working more years would not get me much more.
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Old 09-17-2015, 05:44 AM   #3
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I tried to figure this out as well, but I guess I was too dense. I just assumed that I would lose about 10 percent of what they had projected for me at full retirement age. I hope I will be pleasantly surprised when I get the first check.
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Old 09-17-2015, 07:19 AM   #4
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It makes no difference in my decision for me, maybe about the same increase in SS as you discovered. Even for my DGF, who will leave the workforce after only ~30 years of paying in, it means only an ~$100 a month for working an extra 5 years.

The $100 a month is ~15%, but in the scheme of things it is peanuts. If $100 a month is going to break your retirement dreams, you are going to be living a retirement nightmare anyway. You do not have enough to retire on.

The more you earn, the less the additional years matter.
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Old 09-17-2015, 08:42 AM   #5
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I quit only a month or so ago but I thought it was great that I was only just hitting the second bend point and so the payback was already small. For you it's minute. I get WEPed before the bend point as well so only 40% there.
I would look at my tax return and it would scream retire. Deductions and personal exemption phased out etc.
Note that the bend points are not indexed for inflation but instead for wage growth. So I expect my return from SS to rise as dollars shift from the second leg to the first etc.
Not paying for other people influenced my decision to quit a lot.
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Old 09-17-2015, 10:09 AM   #6
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Like many I was surprised to find that retiring a few years before my full retirement age only cost be a bit more then $100 a month in today's dollars. I never knew about bend points when I worked, but, being blissfully ignorant of such things, I managed to retire just after hitting the 2nd bend point. Sometimes luck favors the ignorant.
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Old 09-17-2015, 10:31 AM   #7
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I did the math for the increase in SS benefits, DB pension benefits, and savings.

I was past the second bend point for SS, so that increase was the smallest.

The other issues were so much bigger that SS was lost in the rounding.
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Old 09-17-2015, 10:39 AM   #8
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I've run some estimates for SS, and I too have noticed there's definitely a diminishing return, once you get enough good earnings years in. If I retired next year at 46, versus this year, at 45, working the extra year would get me a roughly 3.8% increase if I started collecting at 62.

That percentage trends slowly downward, until age 55, where I'd get a 2.6% increase versus quitting at 54. But then, if I stay til age 56, it's only a 1.4% increase, and at 57 it's a measly 0.5% Once I get 35 years of earnings in, plus a few of those early years replaced with better years, any remaining increase is inconsequential.

I would delay retiring if I felt I wasn't financially ready, and wanted to build in a bit more of a safety net. But at that point, SS isn't going to have anything to do with the decision.
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Old 09-17-2015, 03:01 PM   #9
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If you want to get upset about the intricacies of SSA, find the treatise on working spouses by Larry Kotlikoff (IIRC - it might have been by Scott Burns instead). I forget the details, but it showed the futility (for want of a better word) of having a working spouse under many conditions. Effectively, many working spouses work only to support SSA, not their families. The issue comes down to the combination of the SSA taxes taken out AND the lack of payback for the extra wage earner at the time of claiming benefits. The author shows effective tax rates of 50% to 100% on much of the extra wage earner's wages (IIRC). So, I wouldn't worry too much about SSA and OMY - maybe just worry about OMY, but that's just my humble opinion. We could get into a whole political discussion about whether SS is/was a good, bad or ugly program but I've had my bacon for the day and, beside that, YMMV.
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Old 09-17-2015, 03:49 PM   #10
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Quote:
Originally Posted by Koolau View Post
Effectively, many working spouses work only to support SSA, not their families. The issue comes down to the combination of the SSA taxes taken out AND the lack of payback for the extra wage earner at the time of claiming benefits. The author shows effective tax rates of 50% to 100% on much of the extra wage earner's wages (IIRC)...
Amen.
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Old 09-17-2015, 04:00 PM   #11
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Interesting. Now I need to go google SSA Bend pts. I figured once you started earning a high income SSA was not as beneficial to the high-earner as it is to the low-earner of that same "pyramid scheme".

I never really factored in DH and how a low earning DH effects overall SSA. She helps KTLO (Keep the lights on) and without her working we would have to use less lights, do more with less etc.
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Old 09-17-2015, 04:12 PM   #12
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I never ran any numbers on SS until after I had retired. So obviously it had no influence on my decision. During most of the accumulation phase, I figured SS would never be there. So the retirement plan was based solely on my investments and pension. At 54, I'm still 16 years from SS at 70, but I'm beginning to think the odds are somewhere north of 50/50 that I'll collect something, although probably not the full amount currently promised. In any case, turns out I had 35 decent years, but the earliest 4 were pretty low. I never calculated the impact, so not sure if it's significant or not. Doesn't matter much, I wouldn't have stayed even I had known that information, and I'm certainly never going back. If I was going to stay for some reason, it would have been for the pension growth and unvested options that I forfeited.
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Old 09-17-2015, 04:38 PM   #13
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Quote:
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Interesting. Now I need to go google SSA Bend pts. I figured once you started earning a high income SSA was not as beneficial to the high-earner as it is to the low-earner of that same "pyramid scheme".

I never really factored in DH and how a low earning DH effects overall SSA. She helps KTLO (Keep the lights on) and without her working we would have to use less lights, do more with less etc.
The 2015 bend points are $826 and $4,980.

1st Bend Point
Indexed Earnings to reach max: $346,920
Ave Annual Indexed Earnings for 35 years: $9,912
Ave Annual Indexed Earnings for 30 years: $11,564
Ave Annual Indexed Earnings for 25 years: $13,877
Ave Annual Indexed Earnings for 20 years: $17,346
Ave Annual Indexed Earnings for 15 years: $23,128
Ave Annual Indexed Earnings for 10 years: $34,692
Ave Annual Indexed Earnings for 5 years: $69,384
Ave Annual Indexed Earnings for 3 years: $115,640
PIA: $743/month or $8,921/year.

2nd Bend Point
Indexed Earnings to reach max: $2,091,600
Ave Annual Indexed Earnings for 35 years: $59,760
Ave Annual Indexed Earnings for 30 years: $69,720
Ave Annual Indexed Earnings for 25 years: $83,664
Ave Annual Indexed Earnings for 20 years: $104,580
PIA: $2,073/month or $24,872/year.
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Old 09-17-2015, 07:07 PM   #14
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In two weeks I will have 35 full years of SS contributions; one of the milestones on my schedule to retirement. Next year, I will have a max year replace a very low 1981 so I will basically max out my social security. Wife doesn't have many years nor very high so we will take advantage of the spousal benefit. We are planning our retirement for late 2016 with first social security payment in 2027.

I don't think we will have any problems staying below a "means test" (assuming it would be around $250K for a couple and indexed) so including my full social security benefit in retirement planning.

Marc
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Old 09-17-2015, 08:38 PM   #15
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Part of my decision to ER after 22 years of full time employment was realizing that I was beyond the sweet spot of the curve (ie. past 2nd bend-point for cumulative lifetime earnings) for SS accruals and would not be leaving much on the table by leaving early.

A side effect of the design of SS is that it is fairly friendly to ER's. This is due to the payout being based on lifetime earnings and the early earnings are much more heavily weighted than the later earnings.

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Old 09-17-2015, 10:03 PM   #16
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A side effect of the design of SS is that it is fairly friendly to ER's. This is due to the payout being based on lifetime earnings and the early earnings are much more heavily weighted than the later earnings.
I think this may not be quite so. Starting in 1982 the yearly maximum SS taxable wage base is indexed to inflation, so that from 1982 on, all years are grossed up by the cumulative inflation factor, so they should be equivalent. Years before 1982 were indexed the same, but the max amount was set by direct legislation and was lower than it would have been by the 1982 formula, so those years count less.

Also the indexing scales prior years up only to the index as of the year you turn 60. So any earnings from age 60 and after can exceed the maximum of the adjusted years, and hence could count more, assuming they are among the top 35 in your history.

What is friendly to ERs is that the averages are based across all 35 years, so even if you only work a few years, you get the benefit of all 35 years of higher replacement rates (below the first and maybe the second bend point) even if you didn't work those years. Most work in later years is raising the average above the higher bend points, so contributes less to the final benefit amount. I guess in that sense the earlier years of earnings are filling up the lower bend points, so they "count" more.
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