SSA benefits: Surprise at the small cost is of not working for 5 years

[MikeyInMarin]

I retire in a few months (at 64.5 years old). My plan was always to claim SS at 70 - as longevity insurance. I knew there would be a cost to NOT working for 5+ years, but had never checked what the cost of not working for 5 years was. I assumed it would not be a big deal, as it seems to be a common strategy for FIRE folks.

So today I went on the SSA site to check it out and I was pleasantly surprised. I ran the default calculation (work until 70), and with no future income from now. The difference in monthly benefits is < 2%. Given that SS benefits are 'actuarially based' and 5 years of extra employee & employer SSA contributions adds 20+% to what the would government received for me, I would have expected a larger delta.

Am I missing something?

 

[Sunset]

Nope.

There are things called bend points, where your total contributions are used, and the first chunk of money counts the most towards SS, then the 2nd chunk counts less, finally the third bend point is where only 15% is counted towards SS,

So it's a case of diminishing returns if you had good earnings.
If you had small earnings, then after the 35 years of earnings, only higher earning replace the lower ones (adjusted for inflation) so any difference is small.

 

[Out of Steam]

Because of a split government/private career, I have worked less than 30 years under Social Security.

Interestingly, except for lower WEP reductions if I earn enough, I've gotten a similar result of minimal loss of payments for not continuing to work.

 

[qwerty3656]

I noticed the same thing. I have 35 years in, but some of those years are pretty low earnings and I would have thought if I replaced them with high earning years it would make a big difference - but it's really insignificant.

 

[Dtail]

Nope.

There are things called bend points, where your total contributions are used, and the first chunk of money counts the most towards SS, then the 2nd chunk counts less, finally the third bend point is where only 15% is counted towards SS,

So it's a case of diminishing returns if you had good earnings.
If you had small earnings, then after the 35 years of earnings, only higher earning replace the lower ones (adjusted for inflation) so any difference is small.

Well stated and not that well known among the generic folk.

 

[MikeyInMarin]

Thanks Sunset. I had heard of bend points (here in fire), but didn’t bother to look it up.

This part of SS is not actuarially based!

 

[athena53]

Yep. I retired at 61 but waited to collect on my own record till 69. (I collected Survivor benefits from ages 63-69.) At one point I did some research and if I'd worked till age 65 my SS at FRA would have been $50/month more. Before taxes, of course, since both the Feds and the state tax my SS.

Glad I retired at 61.

 

[Fermion]

It is even a better deal if you retired at 47, after putting in 25 years of earnings, you still get a nice chunk.

Those last few years are sucker years for sure.

 

[Jimonlimon]

SSA.tools is a private free website that does a great job of explaining how your benefit is calculated. You can copy your earnings history table from SSA.GOV and SSA.tools will show how each year's earnings are inflation-adjusted for your benefit.

In my case at age 58 I have 35 solid earning years. Working another 5 years at the SSA earnings cap will only add about $50 per month to my benefit.

 

[ncbill]

Yep, the way SS sets those bend point favors early retirement, with not much added to your monthly check past the second bend point.