Retiring Young, how does that affect your future SS benefits?
Old Snipe said
08:37 PM May 1, 2007
Okay, its nice to get on the road young, but we all need an exit plan. Social Security benefits may be part of that plan for many of us and are based on your working life years.
When you cut out 10-15 years before you're able to collect SS benefits, how much can this reduce your SS income?
Is there way to estimate what you will get based on years worked?
Please, no comments about SS won't be there anyway. I remain optomistic that our Congressional leaders will get down to business and figure out a way to keep SS funded.
Best Regards!
-- Edited by Old Snipe at 21:37, 2007-05-01
phyllen said
05:57 AM May 2, 2007
As long as you have 40 quarters (10 years) paid into the system you will collect some benefits. Of course, the draw will be affected by how much you earned. Genreally people earn higher wages in midlife (40's and 50'). So, the benefit would be smaller than if you had continued to work.
Tim & Robyn said
07:13 AM May 2, 2007
Also, there is this: Each year you get an estimate from Social Security projecting what your benefits will be at certain retirement ages. BUT, these projections assume that you will continue working until you retire and begin drawing benefits. Your benefits are based on total earnings, not the total number of years you have worked. This means that if you stop working before you can begin receiving benefits, your projected benefit will decrease for each year you don't work until you finally reach retirement age. My wife stopped working almost four years ago and each estimate for her that we have received since then shows her estimated benefit shrinking. I don't know if there is a tool anywhere for estimating what your final retirement benefit will be, but I'd start looking at www.ssa.gov . That's the Social Security web site.
Hope that helps...
Tim & Robyn
Howard said
09:21 PM May 3, 2007
This is an extremely important topic. Unfortunately, there are far too many variables to predict how much of a reduction in Social Security benefits will be caused by early retirement.
That is, there are too many variables in each person's situation to just put a percentage on it that applies to everyone. In other words we can't just say 10% reduction if your earnings stop 10 years before benefits start or something like that.
To properly estimate, you have to have: 1. your date of birth 2. your earnings for each year up to now 3. a projection of your earnings up to the date of your anticipated retirement 4. the date of your anticipated retirement 5. when you want to start receiving benefits (partial benefits at age 62, or full benefits later)
Too many individual variables. And as fansler said, SS estimate statements you get in the mail presume that you will continue earning your current level of income with cost of living increases up to the date you elect to receive benefits. They project you working and earning up to the age you can receive social security.
So, the "reduction" in benefits we are talking about here is really only a reduction because the statements overestimate future earnings by not anticipating your early retirement.
Now, the Social Security Administration does provide calculators at Social Security Retirement Benefits Calculators. You can more accurately predict your individual benefits based on your own situation.
There is a Quick Calculator where all you have to input is your date of birth and current year earnings. It estimates your prior earnings and future earnings. Easy, but not very accurate.
There is an Online Calculator where you input your date of birth, your complete earnings history by year up to now, and you project your future earnings. You can use it multiple times, changing your projected earnings, your projected date of no more earnings, and your projected date of receiving benefits.
NOTE 1: The Social Security website seems to assume that your "retirement date" is the same date you will start receiving benefits. And "early retirement" is receiving benefits at age 62 or any age before you would receive full benefits at age 65 (the full benefits age is increasing over time, it will be age 67 for Linda and I).
The calculators do anticipate the "possibility" of some of us stopping our earnings before SS benefits kick in , so you can input that information. But the language of the website does not seem to comprehend that concept.
The Online Calculator should be a pretty good estimate for most people. But there is a third calculator, the Detailed Calculator. It requires downloading to your Mac or PC, but it allows you to input the most personal variables for the best possible estimates.
NOTE 2: The calculators DO NOT use the earnings that were actually reported on your W-2s, they only use the amounts you input. Also, the calculators assume that you have the 40 quarters (10 years) of social security earnings needed to qualify for benefits.
I downloaded the Detailed Calculator to try it out. It is not the most user-friendly thing in the world, but it works.
It determined that I would get about $1,300 a month if we never have social-security-taxed-income again AND I wait until age 67 to receive benefits. If I start collecting at age 62, the monthly benefit is closer to $900. That's about right - the early benefit should be about 75% of what the full benefit would be. Linda would also get a decent amount.
I was actually surprised at these numbers since we thought our benefits would be reduced to almost nothing if we go 20 - 25 years without earnings. It's really hard to say what our monthly benefit would have been if we kept working. It was just too far out to accurately project, and it would have been unrealistic to project out our last salaries for so many years.
With that said, we went on the road at our ages anticipating no Social Security benefits when we reach our 60s. We could sure use it, but we are not including it in any type of exit plan. If it's there, great! It'll be gravy.
So, with this important issue, there are ways to get pretty good estimates of the effect of early retirement on Social Security benefits for each individual. But there are no easy one-size-fits-all answers to the question originally posed.
Whew! Sorry about the long reply. Hope it helps!
Readytogo said
07:44 AM May 4, 2007
Not that I am counting on SS at retirement but it is nice to know it does not change it alot if I retire at age 55. It would be approx $100 less a month at age 62 using the calculator. I thought there would be a big difference. Like Howard says if it is there when I retire it would be great, but I still am not counting on it.
53 Merc said
12:37 PM May 4, 2007
Howard, thanks for all your research on this subject. When I decided to investigate, I went to the SSA office in Seguin, TX. When the clerk did the calculations, my benefit was reduced by 10.00. Of course, I was 63 at the time. She looked at me and asked what month do you want benefits to start? No discussion on what year, she meant right now.
Your research will allow lots of people to get a good guess, and if the guess looks like you hope it does, than a trip to an office is in order.
If one wants a true estimate of benefit, I would suggest an appointment with a local office. Go in with your eyes open, but prepare for disappointment if you don't have most of your information.
Ken
Dan and Gail said
07:44 AM May 5, 2007
I realize my age doesn't qualify for the "retiring young", but advance planning is the key to any major life change.
I started visiting the local Social Security office about 5 years before I retired to check my benefits. Always met with the same person and scheduled my visit for mid summer so I was sure my income from the previous year had been posted. I also kept up with the retirement officer where I worked.
That information helped me to decide to continue working fulltime for those 5years until I took an earlier retirement buyout this past November at age 64. I now receive full (age 65) benefits from my employer and am signed up to begin SS benefits in November of this year when I turn 65. I still work part time (2 days/week) at my same employer and have health insurance until I reach 65.
After each visit with SS I received a printed copy of our discussion. The online calculators are great for estimating, but I needed more concrete information since we will be dependent on my retirement and our SS. And I am a planner and spreadsheet nerd. Have to see the numbers in print.
We have designed a fulltiming budget which we believe is very doable and includes monthly savings deposits. We are pretty conservative in our spending and are looking forward to having less bills and responsibilities beginning Jan 2008.
We also are outfitting our motorhome for fulltiming now so we shouldn't have too many large purchases after we start fulltiming. We've taken several long trips and will begin living in it in our driveway this summer as we remodel and refurbish our house to put it up for sale.
Happy planning, Gail
Howard said
10:31 AM May 5, 2007
Okay. A couple more tidbits of information.
In calculating the Social Security retirement benefit, the administration applies an "index" to each year of your earnings. It's sort of a way to make your early years of earnings look like today's dollars.
Then they use your "indexed" earnings to calculate the average of your highest 35 years of earnings. It is that average that is used to compute the Social Security benefit you will receive.
If you don't have 35 years of earnings, then they use $0 for each year to get you to 35 years. That can definitely have an impact on the benefits.
For example, I have twenty years of earnings. Rather than take my twenty years of earnings and divide by 20 to get an average, they will add an additional 15 years at $0 and then divide by 35.
Say my lifetime earnings in those twenty years was $1,000,000 (it wasn't but the numbers are easier ). My average per year in my twenty years would be $50,000. However, they will divide that $1,000,000 by 35 years giving me an average of $28,571 per year. Obviously, that would give me quite a difference in Social Security benefits.
So, as long as you have at least 35 years of earnings on the books, retiring early will have very little effect on your benefits.
You can increase benefits by working longer and having your last few years of earnings (assuming they are the highest) increase your annual average. But unless you anticipate huge salary increases in the final few years, the rewards of working longer probably won't be worth it for the slight increase in Social Security benefits.
So the general moral of the story is your Social Security benefits won't be significantly affected by retiring early IF you already have 35 years of earnings or close to it. However, if you retire several years before having 35 years of earnings in, the Social Security benefits could be significantly affected.
That's why I would encourage folks our age, early forties or younger, to not rely on Social Security if they are considering retiring well before having that 35 years in. The amount they will receive will be far lower than the amount shown on their annual Social Security benefit statement. Again, that statement assumes that you will work until age 62 at least AND that you will continue to earn the same amount currently being earned the rest of your working years.
Okay. I just can't help myself. Here is something else interesting.
The lower that annual 35 year average, the lower your benefits will be. However, the lower that average, the more you will get back from the government as a ratio of what you paid in Social Security taxes.
If you are in the highest income levels, you will get back much less in Social Security than you paid in. If you are in the lowest income levels, you will get back much more in benefits than you paid in.
So by "retiring" as early as we did and having our 35 year average reduced, we are now probably going to get back what we put in and maybe more. If we had continued working we would have paid in much more than we would've gotten back - amounts that we would have been "donating" to the Social Security pool rather than investing for ourselves. So how's that for putting a positive spin on receiving less money from Social Security?
Hopefully, that further explained a few things rather than muddying the waters even more.
Tim & Robyn said
11:10 AM May 5, 2007
Thanks for doing all the research Howard. I wish I'd had the time to do it... maybe after we finally get out of the rat race and hit the road things will be different.
This doesn't really have anything to do with Social Security, because Congress shot down the option to have some of it invested in private accounts, but I found it interesting... In July of 2005 my job was outsourced... the outsourcer hired me to keep doing the same job. I was eligible for early retirement from the employer who outsourced me, and so I took it. I was able to obtain retiree health insurance with monthly premiums so low I'm ashamed to tell anyone what they are. We have family PPO coverage from that, and we also have health insurance coverage through my current employer.
But what was really an eye opener was this: I had a defined benefit retirement program which would have paid a guaranteed amount for life, but it wouldn't start until I reached full retirement age. So, I opted for a lump sum payout which I rolled over into a retirement IRA. The defined benefit was only earning 4 to 5 percent each year; the retirement IRA however has earned 10 to 11 percent in each of the last two years, and believe me I put it in conservative investments. I didn't take the rollover in order to earn higher returns - I did it to protect the value of what was there because of all the news about underfunded retirement programs and companies defaulting on their obligations and turning it over to a government program that generally will only pay out about 60 cents on the dollar.
Social Security is a pay-as-you-go system. We've all heard the stories about how it will go bankrupt if changes aren't made, and soon, because of the declining number of workers paying in relative to the number of people taking benefits out... My experience in the last two years with the rollover just made me wonder how much better off the whole thing would be if at least part of it were in private investment accounts.
When you cut out 10-15 years before you're able to collect SS benefits, how much can this reduce your SS income?
Is there way to estimate what you will get based on years worked?
Please, no comments about SS won't be there anyway. I remain optomistic that our Congressional leaders will get down to business and figure out a way to keep SS funded.
Best Regards!
-- Edited by Old Snipe at 21:37, 2007-05-01
Hope that helps...
Tim & Robyn
That is, there are too many variables in each person's situation to just put a percentage on it that applies to everyone. In other words we can't just say 10% reduction if your earnings stop 10 years before benefits start or something like that.
To properly estimate, you have to have:
1. your date of birth
2. your earnings for each year up to now
3. a projection of your earnings up to the date of your anticipated retirement
4. the date of your anticipated retirement
5. when you want to start receiving benefits (partial benefits at age 62, or full benefits later)
Too many individual variables. And as fansler said, SS estimate statements you get in the mail presume that you will continue earning your current level of income with cost of living increases up to the date you elect to receive benefits. They project you working and earning up to the age you can receive social security.
So, the "reduction" in benefits we are talking about here is really only a reduction because the statements overestimate future earnings by not anticipating your early retirement.
Now, the Social Security Administration does provide calculators at Social Security Retirement Benefits Calculators. You can more accurately predict your individual benefits based on your own situation.
There is a Quick Calculator where all you have to input is your date of birth and current year earnings. It estimates your prior earnings and future earnings. Easy, but not very accurate.
There is an Online Calculator where you input your date of birth, your complete earnings history by year up to now, and you project your future earnings. You can use it multiple times, changing your projected earnings, your projected date of no more earnings, and your projected date of receiving benefits.
NOTE 1: The Social Security website seems to assume that your "retirement date" is the same date you will start receiving benefits. And "early retirement" is receiving benefits at age 62 or any age before you would receive full benefits at age 65 (the full benefits age is increasing over time, it will be age 67 for Linda and I).
The calculators do anticipate the "possibility" of some of us stopping our earnings before SS benefits kick in
The Online Calculator should be a pretty good estimate for most people. But there is a third calculator, the Detailed Calculator. It requires downloading to your Mac or PC, but it allows you to input the most personal variables for the best possible estimates.
NOTE 2: The calculators DO NOT use the earnings that were actually reported on your W-2s, they only use the amounts you input. Also, the calculators assume that you have the 40 quarters (10 years) of social security earnings needed to qualify for benefits.
I downloaded the Detailed Calculator to try it out. It is not the most user-friendly thing in the world, but it works.
It determined that I would get about $1,300 a month if we never have social-security-taxed-income again AND I wait until age 67 to receive benefits. If I start collecting at age 62, the monthly benefit is closer to $900. That's about right - the early benefit should be about 75% of what the full benefit would be. Linda would also get a decent amount.
I was actually surprised at these numbers since we thought our benefits would be reduced to almost nothing if we go 20 - 25 years without earnings. It's really hard to say what our monthly benefit would have been if we kept working. It was just too far out to accurately project, and it would have been unrealistic to project out our last salaries for so many years.
With that said, we went on the road at our ages anticipating no Social Security benefits when we reach our 60s. We could sure use it, but we are not including it in any type of exit plan. If it's there, great! It'll be gravy.
So, with this important issue, there are ways to get pretty good estimates of the effect of early retirement on Social Security benefits for each individual. But there are no easy one-size-fits-all answers to the question originally posed.
Whew! Sorry about the long reply. Hope it helps!
I started visiting the local Social Security office about 5 years before I retired to check my benefits. Always met with the same person and scheduled my visit for mid summer so I was sure my income from the previous year had been posted. I also kept up with the retirement officer where I worked.
That information helped me to decide to continue working fulltime for those 5years until I took an earlier retirement buyout this past November at age 64. I now receive full (age 65) benefits from my employer and am signed up to begin SS benefits in November of this year when I turn 65. I still work part time (2 days/week) at my same employer and have health insurance until I reach 65.
After each visit with SS I received a printed copy of our discussion. The online calculators are great for estimating, but I needed more concrete information since we will be dependent on my retirement and our SS. And I am a planner and spreadsheet nerd. Have to see the numbers in print.
We have designed a fulltiming budget which we believe is very doable and includes monthly savings deposits. We are pretty conservative in our spending and are looking forward to having less bills and responsibilities beginning Jan 2008.
We also are outfitting our motorhome for fulltiming now so we shouldn't have too many large purchases after we start fulltiming. We've taken several long trips and will begin living in it in our driveway this summer as we remodel and refurbish our house to put it up for sale.
Happy planning, Gail
In calculating the Social Security retirement benefit, the administration applies an "index" to each year of your earnings. It's sort of a way to make your early years of earnings look like today's dollars.
Then they use your "indexed" earnings to calculate the average of your highest 35 years of earnings. It is that average that is used to compute the Social Security benefit you will receive.
If you don't have 35 years of earnings, then they use $0 for each year to get you to 35 years. That can definitely have an impact on the benefits.
For example, I have twenty years of earnings. Rather than take my twenty years of earnings and divide by 20 to get an average, they will add an additional 15 years at $0 and then divide by 35.
Say my lifetime earnings in those twenty years was $1,000,000 (it wasn't but the numbers are easier
So, as long as you have at least 35 years of earnings on the books, retiring early will have very little effect on your benefits.
You can increase benefits by working longer and having your last few years of earnings (assuming they are the highest) increase your annual average. But unless you anticipate huge salary increases in the final few years, the rewards of working longer probably won't be worth it for the slight increase in Social Security benefits.
So the general moral of the story is your Social Security benefits won't be significantly affected by retiring early IF you already have 35 years of earnings or close to it. However, if you retire several years before having 35 years of earnings in, the Social Security benefits could be significantly affected.
That's why I would encourage folks our age, early forties or younger, to not rely on Social Security if they are considering retiring well before having that 35 years in. The amount they will receive will be far lower than the amount shown on their annual Social Security benefit statement. Again, that statement assumes that you will work until age 62 at least AND that you will continue to earn the same amount currently being earned the rest of your working years.
Okay. I just can't help myself. Here is something else interesting.
The lower that annual 35 year average, the lower your benefits will be. However, the lower that average, the more you will get back from the government as a ratio of what you paid in Social Security taxes.
If you are in the highest income levels, you will get back much less in Social Security than you paid in. If you are in the lowest income levels, you will get back much more in benefits than you paid in.
So by "retiring" as early as we did and having our 35 year average reduced, we are now probably going to get back what we put in and maybe more. If we had continued working we would have paid in much more than we would've gotten back - amounts that we would have been "donating" to the Social Security pool rather than investing for ourselves. So how's that for putting a positive spin on receiving less money from Social Security?
Hopefully, that further explained a few things rather than muddying the waters even more.
This doesn't really have anything to do with Social Security, because Congress shot down the option to have some of it invested in private accounts, but I found it interesting... In July of 2005 my job was outsourced... the outsourcer hired me to keep doing the same job. I was eligible for early retirement from the employer who outsourced me, and so I took it. I was able to obtain retiree health insurance with monthly premiums so low I'm ashamed to tell anyone what they are. We have family PPO coverage from that, and we also have health insurance coverage through my current employer.
But what was really an eye opener was this: I had a defined benefit retirement program which would have paid a guaranteed amount for life, but it wouldn't start until I reached full retirement age. So, I opted for a lump sum payout which I rolled over into a retirement IRA. The defined benefit was only earning 4 to 5 percent each year; the retirement IRA however has earned 10 to 11 percent in each of the last two years, and believe me I put it in conservative investments. I didn't take the rollover in order to earn higher returns - I did it to protect the value of what was there because of all the news about underfunded retirement programs and companies defaulting on their obligations and turning it over to a government program that generally will only pay out about 60 cents on the dollar.
Social Security is a pay-as-you-go system. We've all heard the stories about how it will go bankrupt if changes aren't made, and soon, because of the declining number of workers paying in relative to the number of people taking benefits out... My experience in the last two years with the rollover just made me wonder how much better off the whole thing would be if at least part of it were in private investment accounts.
Enough of these rambling musings....