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How Early Retirement Impacts Social Security Benefits

How Early Retirement Impacts Social Security Benefits

How Early Retirement Impacts Social Security BenefitsI originally wrote this piece in 2012 to figure out how early retirement impacts Social Security benefits. A lot has happened since then. I retired from my engineering career to become a stay-at-home dad/blogger. My income dropped quite a bit, but my happiness increased tremendously. After 6 years, I’m very happy that I retired early and I haven’t regretted it yet. Fortunately, I’m having some success with blogging. Last year, Retire by 40 generated $65,388 in revenue. That’s more than I ever imagined when I started this blog.

Last year was a banner year for Retire by 40, but my self-employment income fluctuated wildly over the last 6 years. This means my Social Security estimated benefits also changed from year to year. The estimated benefits assume you’ll make a similar amount of income until you retire which isn’t the case for me. My estimated benefits ranged from $2,100/month to $2,500/month. This is exactly why I wrote this post. I want to get a more accurate estimation and see how early retirement changes your benefits. Okay, we’ll quickly review how the Social Security benefit is calculated. Then we’ll go through 3 scenarios to see how early retirement impact my Social Security Benefits.

Social Security recap

In the United States, Social Security is the Old-age, Survivors, and Disability Insurance (OASDI) federal program. Social Security is funded through payroll taxes and is meant to be a safety net for all qualified workers. We’ll focus on the “Old-age” or retirement part of the program today. Not everyone is qualified for Social Security retirement benefits. Here are the important things to know about Social Security.

  1. First, you need 40 credits to be eligible for the Social Security retirement benefit. You can earn up to 4 credits each year. Almost all Americans make enough income to earn these 40 credits over their working life.
  2. The benefit (Primary Insurance Amount or PIA) is calculated from your average indexed monthly earnings (AIME.) This takes your highest 35 earning years and averages them out to a monthly earning. Once you have the AIME, then the benefit is calculated with the following formula.
  • A) 90 percent of the first $895 of his/her average indexed monthly earnings, plus
  • B) 32 percent of his/her AIME over $895 and through $5,397, plus
  • C) 15 percent of his/her average indexed monthly earnings over $5,397.

*Updated in 2018. These numbers change every year to reflect inflation.

Bend Points

The graph below is sometimes called the “Benefit Formula Bend Points.” It shows that the more you earn, the more Social Security Benefits you will receive in retirement.

Social Security bend points

We can see that the less money you made over your working life, the more helpful Social Security will be in retirement. If your AIME is about $1,000, then the PIA (Social Security Benefits) would replace almost 90% of your income. As the AIME increases, the benefit covers less percentage of your income. So if your AIME is about $9,000, then you’d receive $2,788 or 30% of your average monthly income. For 2018, $2,788 is the maximum amount of Social Security Benefits you can receive.

This is about right because lower income households need a lot more help with retirement. High-income earners can save more in their retirement accounts and pay for their own retirement.

I also added where Mrs. RB40 and I are on this graph. We already collected 40 credits and qualified for Social Security Benefits. We’ll dig deeper into those 2 dots next.

Early Retirement Impacts Social Security Benefits

Social Security is a bit uncertain for my generation because the program will start to run out of money in our early 60s. If Congress doesn’t reform the program by 2034 then it will only have enough money to pay out about 75% of the full benefit. However, Social Security reform is going to be extremely difficult. The Congress is ridiculously bipartisan today and they can’t get anything done. It’s ridiculous. They’ll keep kicking the can down the road and we’ll all pay the price someday. Workers and employers probably will have to pay higher payroll taxes. The retirement age will probably increase too. We’ll join Congress by sticking our heads in the sand and ignore the problem for now.

*For 2018, you pay social security tax up to $128,400 of your earnings.

If you paid close attention to the recap above, you would know that early retirement will decrease your Social Security benefit. Retiring early means you will miss out on your peak earning years and this will reduce your AIME, the average of your 35 highest earning years. I quit my engineering career at 38 and I still don’t have 35 years of earnings yet. As of 2018, I have 24 years of earnings under my belt. That means I have 11 years of no earnings to bring my AIME down. That’s why my current standing is a bit below the second bend point.

My current AIME is 24 years of earnings divide by 35.

Joe’s AIME = $4,894

Luckily, I had some income over these last few years, but who knows how long that will continue. Here is the chart of our Taxed Social Security Earnings.

Taxed Social Security Earnings

Mrs. RB40’s AIME is even worse. She also has 24 years of earnings, but she had low earnings for many of those years. Now she makes more money than I do, but it will take many more years before her AIME catches up to mine.

Mrs. RB40’s AIME = $2,658

Now let’s go through a few scenarios and see how my benefits will turn out.

Estimated Social Security Benefits

Here is my latest Social Security statement

You have earned enough credits to qualify for retirement benefits. At your current earnings rate, your estimated payment would be:

At full retirement age (67): $2,510 a month

At age 70: $3,113 a month

At early retirement age (62): $1,763 a month

Your estimates are based on the assumption that you will earn $60,524 a year from now until retirement.

I don’t really trust this because my online income is very unstable. I doubt this blog will continue to generate this level of income. Let’s use the Detailed PIA Calculator to figure out a few more scenarios. They used to have this online, but now you have to install the program on your computer. It’s a pain to install and figure out how to use. Anyway…

Full retirement now: $2,096/m

If I stop working now and have no more earned income, my benefits would be $2,096 when I’m 67. This is the red dot on my Retirement Social Security Benefit graph above. This PIA is relatively low here because I have 11 years with no earnings. Remember, I only have 24 earning years up until today. The AIME calculation sums up your highest 35 earning years and averages them out. The 11 zeroes drag down the average.

Part-time Self Employment for 11 more years: $2,354/m

My online income has been unstable, but I’m pretty sure I can make $36,000/year for 11 more years. Once RB40Jr (our son) goes off to college, I probably will stop working completely to travel more. In this scenario, I’ll make $36,000/year until 2030. Then I won’t have any income after that. My estimated benefits would be $2,354/month. That’s significantly more than if I stop working completely now. The $36,000/year replaced many of the $0 earning years in the AIME calculation.

Part-time Self Employment for 21 more years: $2,369/m

What if I continue working part-time for 10 more years until 2040. That will increase the estimated benefits by just $15. Wow, that’s pretty crazy. Working 10 more years for $15/month extra in Social Security Benefits? That isn’t a good trade.

This increase is very minimal because working 10 more years didn’t change the AIME much. In the previous scenario, I have 35 good working years. $36,000/year at that point isn’t increasing the average much.

Back to work as an engineer for 21 more years: $2,791/m

This one makes a big difference. If I bite the bullet and go back to work as an engineer ($100,000/year), my Social Security Benefits would increase considerably. However, I really don’t want to do that. Life has been too good since I retired.

Scenario Estimated Social Security Benefits
Full retirement now $2,096
Part-time self-employment until 2030 $2,354
Part-time self-employment until 2040 $2,369
Back to full-time employment until 2040 $2,791


You can clearly see how early retirement impacts Social Security Benefits in this spreadsheet. If you retire before working for 35 years, it will hurt your benefits a lot. Once you worked for 35 years, working more wouldn’t make much difference unless you also make a lot more money. Now that I know this, does it change my mind about early retirement?

After 6 years of being a SAHD/blogger

Not at all, things are looking pretty good in early retirement. Even if I stop working completely today, I’d still receive $2,096 in Social Security retirement benefit when I turn 67. That’s not too shabby. Mrs. RB40 should also receive at least $1,400 in benefits if she retires now. That’s $3,500 per month and it will cover 70% of our monthly expense. If we keep earning income until 2030, the Social Security Benefits should cover almost 100% of our monthly expense. Assuming we can keep lifestyle inflation under control, of course.

The only big hiccup is future changes to the Social Security program. Once Congress get their act together and reform Social Security, we’ll all feel the pain. Bah, I’ll deal with it when the time comes.

I’m sure we’ll get some benefits so I’m not worried too much. Meanwhile, we will keep working to increase our passive income. Once our passive income surpasses our expense consistently, then we’ll be set for life. Any Social Security Benefits will be gravy. My father in law uses his Social Security Benefits as a donation fund. I’d love to do the same when we’re 67.

Have you checked your Social Security statement lately? Are you counting on it to fund your retirement?

Photo by Marc Szeglat

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