Ready For Retirement
Ready For Retirement
Here's How Early Retirement Will Impact Your Social Security Benefit
Thinking about retiring early and worried it might hurt your Social Security benefits? Good news: it probably won’t.
A common myth is that you have to work into your 60s to get the most out of Social Security. In reality, benefits are based on your 35 highest-earning years—not the age you stop working.
This episode breaks down how benefits are calculated, what “bend points” are, and why even part-time income in semi-retirement can make a difference.
There’s also an important distinction between when you stop working and when you start claiming. Monthly benefits can range from around $1,400 at age 62 to $2,400 at age 70, depending on the timing.
Curious what your own numbers look like? Head to ssa.gov to create a free account and check your personalized estimate. It’s a simple step that can help you make smarter retirement decisions.
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I don't care how big your portfolio is. The decision of when you collect Social Security is going to be one of the most important decisions you make with your retirement. That being said, what happens to that Social Security benefit if you retire early? That's exactly what we're going to discuss today. Aaron, today we're talking about Social Security, and all of us more or less know that Social Security is going to be a core part of our income when we retire. What we don't always know is what happens to that if we retire early. In other words, do we have to keep working until 62 or 67 or 70 to maximize what we're doing? And that's what we're going to talk about today.
Speaker 2:Yeah, I think you know, looking at social security, it is the backbone for the vast majority of people's retirements and I think one of the biggest questions you can ask yourself and answer correctly hopefully is when should I claim? And so many people want to step away from the workforce, maybe in their late 50s or their early 60s, and the earliest you can claim Social Security is 62. There are some consequences with that Maybe good, maybe bad. It really just depends on circumstance.
Speaker 1:So with that, the earliest you can collect is 62. Does that mean that I have to work until age 62 in order to maximize what I would get at age 62?
Speaker 2:Absolutely not. That's when most people are eligible. I mean, if you have a disability, we have some exceptions here, but if you claim early at 62, you receive a reduced benefit from what would otherwise be your benefit at what the government considers full retirement age, which is generally entering its way towards 67 right now. For retirees in 2025, it's 66 and 10 months, I believe. Is that the proper retirement age right now?
Speaker 1:And working its way up to 67, yes, depending on your birth year, and I think that what's really important for people to know probably is how is social security actually calculated?
Speaker 2:Yeah.
Speaker 1:And what some people don't realize. It has nothing to do with how long you work. It has everything to do with how many years you worked and how much you earned during those years that you were working. So what does that look like? How many years do you have to work, and what does social security do in each year to determine what goes into the Social Security formula?
Speaker 2:Yeah, I think the biggest thing to take away is that Social Security only looks at your highest 35 earning years and I think one of the really really important things to look at is you know, if we look at our income when we were 20 or when we were 30, it was probably significantly less than we were, than it was when we were in our 50s or our 60s. And I think some people get concerned and think, oh, I have to keep working to get these higher earning years in there. But I think some people forget that there's an inflation adjusted element to this. Could you speak to what that inflation adjustment looks like?
Speaker 1:Yes, you have something called your average index monthly earnings. And so, like you're saying, aaron, when you worked as a 20-year-old and that was 40 years ago you probably weren't making even what a 20-year-old today would be making, and that's simply due to inflation. And so what Social Security is doing is they're saying there's a formula and that's simply due to inflation. And so what Social Security is doing is they're saying there's a formula and this formula is going to look at the 35 highest years of earnings, of average index monthly earnings that you earned, and we don't care if you earn those when you were 60, when you were 20, when you were 40, when you were 16. We're just looking at those earnings and we're going to adjust them for inflation each year. And so what they're doing is they're taking that and they're taking that formula to say whatever that looks like.
Speaker 1:There's all sorts of things called bend points and how much does every dollar that you earn actually impact the benefit that you're going to get? But it's those top 35 years of earnings. I'm leaving money on the table of social security if I do so, and you might be, but it again doesn't have anything to do with the year that you retire is everything to do with. Have you already paid in to social security for 35 years and what was the amount of that? Because, hypothetically, if someone started working at age 20 and let's say that's really strong income From the time they started working, for the next 35 years, by the time that they're 55, they're done working.
Speaker 1:Yeah Well, their social security benefits are fully maximized. It doesn't matter if they keep working from 56 and beyond, earning a million dollars a year, if they've maximized their social security contributions every single year on an inflation-adjusted basis. So again, this every year is adjusted for inflation. Continuing to work is not actually helping their social security, but their benefits already maxed. Once it's maxed, it's maxed. You can't do anything to increase that benefit other than waiting longer to take it, in which case the benefit just goes up from there. But that's the most important thing to note. Is there's maybe this myth or this misconception that if I stop working at 55 or if I stop working at 60, my social security benefits going to suffer? Do you hear?
Speaker 2:that when you talk to people, do you see that that concern?
Speaker 2:All the time I think there's kind of this misconception that if I retire at 58, even if I haven't yet claimed social security, my benefit is somehow going to be penalized because it's only looking at, say, my last 35 years, and that's just not true. It's looking at your highest earning 35 years, whenever they happened. And I always like to remind people that that inflation adjustment stops for your working income after the age of 60. So it's very real that maybe your earnings at the age of 59 are more impactful for your social security than they are at 61. Because let's say we take inflation or I guess not inflation let's take raises out of the equation and let's say somebody is making $100,000 a year. If they're making $100,000 at the age of 59, once we go to claim social security that gets a bump up due to inflation. If you're making $100,000 at the age of 61, if you have other higher years that are inflation adjusted higher, that year for your 61 year is not going to factor in because that does not get an inflation adjustment.
Speaker 1:And the reason and the way this works for people listening is this year, for example. And the reason and the way this works for people listening is this year, for example, you pay Social Security taxes on the first hundred and seventy six thousand one hundred dollars you earn. So if you earn above that, you're not paying in any more Social Security tax. Now the amount that you are getting credited to what's called your primary insurance amount is also capped. So no more taxes in, but no more increase to your benefit, and the way that works is of that hundred and seventy six. You might know the exact numbers, aaron. I forget them off the top of my head, but it's the first. There's two bend points. And then the first bend point says the first monthly earnings up to like 1200 to 1300,. I want to say, off the top of my head, 90% of every dollar that you earn up to that amount on a monthly basis is contributed to the formula that determines how much you're going to get. The second bend point is what?
Speaker 1:30%, 33% 35%, I believe 35% is contributed to it and then above that is, I think, 15%, something around there. So it's one of these things that it's like a reverse progressive scale where the more you earn you're still paying the same social security tax, up to a cap, but the less it's actually increasing the benefit that you're going to get. And the reason for that is to say that the lower income workers, all else being equal, your Social Security benefit will be a higher percentage of what you earned than it would have been for someone who wasn't, someone who wasn't. But for planning purposes, where this also comes into play is, say, you are wanting to retire at 55 and you have 30 years of earnings. You work from 25 to 55.
Speaker 1:If you completely stop working, it's zeros across the board. So social security is still going to take your 35 highest years. But they're going to say you actually have 30 years of earnings and we're going to look at your average index monthly earnings. You don't have any other year, so we're just going to use zeros for those other five years to get the full 35, to run the formula to give you the amount your primary insurance amount that you could receive at your full retirement age. This pinpoint, this understanding of how binpoints works is so important, because maybe it's not retirement you want. You just don't want to be working 60 hours a week anymore.
Speaker 2:Yeah.
Speaker 1:You don't want to be having that same high stress job. Well, do you go, take a different job that even you earn just a small amount, a couple thousand bucks a month, and you look at that and you say that's not going to dramatically increase my social security benefit? Maybe not dramatically, but it will have an impact, because those, those First dollars that you're making, are weighed most heavily in terms of how social security is going to be calculated. So this is where it ties very much back to the financial plan of what are you actually trying to do? Is it actually be done working and never go again, or is it? Are you trying to escape from that high stress, high pressure job, the boss you don't care for? Is there an alternative that still allows you to keep building your benefit, but not at the cost of sacrificing everything else?
Speaker 2:And absolutely those modest income, the cost of sacrificing everything else and absolutely those modest income increases.
Speaker 2:Just eliminating the zeros, if that's something you want to do, as you said, can go a long way.
Speaker 2:Making $20,000 a year, $30,000 a year and I always like to think of it from the perspective of the entire household, because it's not just that you're increasing your benefit. If you had a stay-at-home spouse or a spouse who didn't have an income that allowed them to create a substantial social security benefit for themselves and more stability for the household, if we tackle this from a holistic picture and we say, okay, how can I maximize my benefit, even if it's just that incremental amount? So is it worth your sanity to go back to work part-time and increase it a couple hundred dollars? Maybe the answer is yes, maybe the answer is no, but you kind of have to look at your household and where your benefit currently stands. And I always tell people go to ssagov, one of the best government websites or the best government website out there, because you can actually see what your benefit is going to be. So many people don't even have an idea of what their benefit's going to be.
Speaker 1:Yeah, speaking of ssagov and social security, obviously a lot of government programs have a bad it's. Every program is always like the DMV. Why don't? I've actually been pleasantly surprised in hearing stories from clients who have the. They are very helpful If you get a social security rep on the phone. This isn't a hundred percent of the time, but it was striking. It was a very surprising experience. A lot of people had that. It was very easy. It was very helpful, actually helped them to work through this stuff and find what they needed. Let's do this now. Erin, there's a difference between how many years you work and when you actually collect social security. Both of those are going to have an impact on what will your actual benefit be when it comes time to collect. So if I work a certain number of years, does that impact when I have to collect my benefit or when I'm going to be forced to collect my benefit?
Speaker 2:Once you have your work history there it kind of comes down to when do you want to generate an income stream for your household? Now I think of Social Security as a longevity insurance, because when you decide to claim basically creates your income floor in retirement. The earlier you claim, you're going to get an income sooner, but it's going to be lower. So if you claim at 62, as we said earlier in the video you get a benefit that is about 70% of what it otherwise would have been at full retirement age. But the trade-off is you get an income sooner, so you're going to get an income throughout a longer duration of your life. If you delay, you're going to be heavily relying on investments if you've stepped away from the workforce, so you're going to have to make sure to build up a more robust investment portfolio. But the trade-off here is that you get a higher monthly benefit later on. Now you can delay all the way to full retirement age. You can delay all the way up to 70. And the benefits do increase substantially. You know, going from a 70% benefit that you would have otherwise had at say, say, if you had a $2,000 benefit at the age of 67. I know this one just because this is the average monthly social security check. And if you claim early, for easy math at the age of 62, 70% of that is about $1,400 a month. Now if you decide to delay to the latest claiming age of 70, that benefit's going to increase to about $2,400 a month. So there can be a pretty large disparity between when you claim as far as early or late.
Speaker 2:As far as what your income would be, Do you want your income floor to be $1,400 a month? Do you want it to be $2,000 a month? For full retirement age, Do you want it to be $2,400 a month? I think there are trade-offs for all of them. I don't think there's a right answer. I don't think the answer is always claim early, wait until full retirement age or delay. I think it's about looking at what your portfolio can generate. How much pressure do you want to put on your portfolio in those early years and how much guaranteed income stream do you want later in your retirement, when you're 80, when you're 90? What do you want your guaranteed income streams to look like and how much of the brute force of your retirement do you want your investments to carry?
Speaker 1:Yes, lots of considerations, exactly what you're saying. How long do you think you're going to live? Obviously, we don't have any idea. But what's health history like? What's family history like?
Speaker 1:Spousal decisions, what do you want the implications to be if you're married? For a spousal benefit, for a potential survivor benefit? How do you de-risk what you're trying to do versus how do you maximize the income that you're potentially looking for? So social security seems like this fairly simple thing, but there are so many implications that tie into everything the way you invest, the tax strategies that you do or don't employ, the way that you protect yourself, your spouse, your family Everything is seemingly touched by the decision you make around social security.
Speaker 1:One final thing, maybe a couple of final things there, and I think it's important to so many people if they are going to retire early, they have a statement and that Social Security statement says you know, I'm James, I'm 60. Here's what Social Security says I'm going to get. I want to retire right now, say I'm 60. Okay, but my statement says that it's assuming. Here's what my benefit would be if I continue to earn what I've been earning up until now. How do I think about that, and is that going to change if I were to stop working at the age of 60?
Speaker 2:Well, to go over how you phrased it earlier, kind of depends If you already have your 35 highest earning years or you have 35 years under your belt. If those were your highest earning years, it really doesn't matter, it's not going to change a darn thing. If you otherwise would have had higher earning years, that would replace zeros, it would marginally increase your benefit and that might be factored into the statement. If those would be higher earning years, If it would be lower earning years, then your benefit might reduce a little bit. So I mean, in two years time your benefit is not going to change drastically, Even if we're talking about lopping off zeros. It might change by 50 or $100 a month. But I mean we're not going to see these huge, dramatic shifts. And people just have to know that you can stop working at the age of 58 or 60. You can wait to claim until the age of 62. As long as you have your 35 highest earning years, your benefit's going to be there.
Speaker 1:Yes. So the benefit's going to be driven by a couple of things. One is the average index monthly earnings and the number of those that you have, so your highest 35 years and how much were you actually paying in each year? And then, second is when do you actually decide to collect? Any time between 62 and 70? Those decisions are not necessarily commingled, meaning the way you decide one does not impact the other. You could stop working at 40 and still fully collect social security at 70. You could work until 70 and collect social security at 62. Now, probably not wanting to do so if your income's over a certain amount because there's earnings limits and all that. But they are two very independent decisions. But those are the two decisions that are going to be the driving force behind how much will you actually receive with your social security benefit, erin, anything else you want to add before we start to wrap up?
Speaker 2:I love how you phrased it as a two-prong approach for Social Security. Make sure you look at it from the stance of how many working years do you have? How long do you want to delay? Do you want to claim early full retirement age or delayed? I think my biggest two cents I want to put out there is social security is probably one of the biggest, if not the biggest, retirement income decision you're going to make. So just don't throw it at a dartboard and choose an age randomly. Choose an age that works for you and any age can be great, but just make sure it fits within your financial plan, yeah.
Speaker 1:It's a big decision, lots of implications. Hopefully this episode helped to clarify some of the things that decision hinges upon.
Speaker 2:So, Erin this is great and we will see you all next time. Sounds good. Bye, guys, thank you.
