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The actual formula for how benefits are determined is somewhat cloaked in mystery (at least to me). Before I retired in mid 2001 at age 55, I tried to at least take a look at this topic. The SS website at the time had a calculator which you could use to estimate future benefits. I think it began with an estimate based on you continuing to work at your current annual income level until FRA. So I already had an approximation of what might get if I continued to work. Then you could customize this by putting in different income numbers. I put in zeros and hit enter. When I looked at the output, the difference between working and not working was minimal. Of course I had more years of employment than the number of years required, and had many years of hitting the maximum which was taxed.
I don’t know if this was a fluke or not. It is something to consider, if you aren’t going to get a higher benefit by working until 66 or your FRA.
In our never ending discussion regarding social security claiming I have recently added an additional blog source, Early Retirement Now, whose various Safe Withdraw Rate (SRW) series articles, comments and thinking combines SS claiming with other frequent retirement topics.
For example I enjoyed reading Karsten Jeske’s 59th blog in his SRW series-
https://earlyretirementnow.com/2023/09/05/timing-social-security-swr-series-part-59/
A hour plus long Forget About Money podcast interview by David Bauchier of Mr. Jeske on 7/3/2014 discusses, among many things, Karsten’s thinking about both safe rates and sequence of return risk.
My take away is that in my personal financial planning I need to not fall in a trap of making a particular decision in isolation.
If you really want to understand the Social Security formula, download the detailed calculator from their site and run scenarios. It’s clunky, but seeing just how working more years at various salaries affected my benefits was educational.
For me, replacing two low earning years was worthwhile, but otherwise additional years didn’t make much difference because my income is well above the second bend point and I had 35 years.
I haven’t looked at the formula for a while, but SSA takes your total income that was subject to SS tax for each year, adjusts them for inflation since that year, and adds the highest 35 years together. If you don’t have 35 years of paying into SS, $0 is added for the remainder of the 35 years. Then they divide that by 420 (the number of months in 35 years). Then they take 90% of the first X dollars, 32% of the next Y dollars, and 15% of the next Z dollars and add them together to calculate your initial monthly SS payment. The values of X, Y, and Z are determined each year but only the ones for the year you begin taking SS matter for you.
If your income was high enough so that you are in that 15% bracket, working more years probably won’t increase your SS payments much, although if you start collecting before your FRA, the payments will be reduced.
My case was complicated by the fact that for the first 8 years of my career I worked for the Federal Government, which wasn’t covered by SSA at that time. I retired from fulltime work at 51, so I only had about 20 years of SS coverage. I worked another 20 years part-time at less than 25% of my previous salary. My total was still high enough to be in the 15% bracket when I began receiving SS at my FRA of 66.
Mike Piper has a nice free calculator on open social security. This doc also a calculator and a blog post on the topic. If you search on Social Security bend points, you’ll have a treasure trove of minutia. Social Security & Early Retirement 2024: Know Your Bend Points! – Physician on FIRE. As Jonathan mentions, it seems a key bend point is around 20 years of paying in.
Nice article! Thanks for sharing!
I appreciate your raising the topic even though you already retired 23 years ago at age 55. My wife and I plan to retire around age 55 in about 12 years, so it’s relevant for us.
To let you know how we’re handling it: we don’t really care. We’re not counting or counting on SS. We’re acting like it doesn’t exist in case it doesn’t exist for us. If it does, then great! If not, then we’ll still retire with dignity (Lord willing and the creek don’t rise).
Does someone who can afford to voluntarily retire in their 50s have to worry about the size of their future SS benefit?
Yes!
It’s all part of the planning process. No different than knowing an expected pension benefit, anticipated portfolio value, monthly expenses, etc. All lead to well informed retirement and other financial decisions. Information is good. More information is gooder!
I would refer to Social Security Made Simple by Mike Piper, page 4. I would recommend you purchase this book as a great tool for getting your arms around SS. The SS website still has a model but you should understand the “bend points” that make SS replace a higher portion of wages for low income workers vs.higher income. There is a nice graphic in Sanjib Sanha’s post that illustrates this well.
No fluke. I ran my FRA projections when preparing to retire at 58 and then had a mild panic attack months later when I noted that the calculator assumes continuing to earn my last salary until FRA which would have been 9 more years. I changed the assumptions to $0 future earnings, held my breath, and hit “enter” only to find my monthly benefit was only going to change by roughly two cocktails/month. If you’ve made good money for 35 years, you’ve pretty much pegged the meter and future earnings mean little to your benefit. Also, the benefit calculation is heavily weighted towards lower salaries and has a max cap. The net result is that, for many HD readers, their benefit is not that much different from Bill Gates’ or Warren Buffett’s.
Sanjib Saha wrote about this issue early last year. You can find his article here.
I remember being told that, while the minimum number of quarters needed for benefits is 40 (i.e. 10 years) and the most that’s considered is 35 years, workers should strive to pay payroll taxes for at least 21 years, because those 21 years will give them much of the credit they need to get a decent Social Security check once they retire.