Here’s How Mine Went

One of the knocks on early retirement is how it can negatively impact one’s future Social Security benefit. My recent Social Security estimate with zero earnings going forward is somewhat surprising. We pull our Social Security estimate to get an idea of what it will be. We then can use that information in our retirement plan and plug it into our favorite retirement calculator. It’s quite obvious when looking at our SSA estimate that claiming our benefit early at age 62 will result in a lifetime of lower monthly payments.

Choosing early retirement means we have decisions to make about when to claim our future benefit at age 62 or later. But how accurate is our Social Security estimate? The problem is that it uses something that’s a little less clear. It has a line that says: Your estimated taxable earnings per year after 2019……………..$XX,XXX. It uses our prior year’s earnings in the benefit calculation going forward to the reported filing ages to come up with the estimated age based payment results.

That earnings part of the Social Security calculation will be lower than the optimistic forward earnings estimate they used when it drops to a lesser number or to NONE once we retire early. Based on that sometimes overlooked line, one would expect that our received benefit may be lower than what we are looking at and used in our pre-retirement planning. But how much lower?

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My Social Security Estimate With Zero Earnings

There are a lot of moving parts to how our Social Security benefit is determined. It’s presented to us in today’s dollars so we can make a mental association. We get a monthly benefit figure for age 62, our Full Retirement Age (FRA), and age 70. Before I reveal my numbers it’s important to understand the basics of how our Social Security is calculated. At a high level it has 4 components that go into it.

1- Social Security Payment Years

To qualify for Social Security benefits we must have had at least 10 years of paying into it through accumulated work time with a significant amount of earnings. The benefit is calculated based on the highest 35 years of earnings. If we have less than 35 years of paying into Social Security then $0 is used for the deficit number of missing work years and averaged for our benefit calculation. But it is more complicated than just that.

2- Surprise! Social Security is means tested through PIA

Primary Insurance Amount, aka PIA, is a weighted formula that gives higher Social Security benefits relative to overall career earnings for lower earners than for higher earners. The PIA formula uses what’s called your average indexed monthly earnings (AIME) in the calculation.

3- Our ancient salaries of decades past are normalized for inflation with AIME

The Average Indexed Monthly Earnings, aka AIME, is an inflation adjustment that uses wages instead of consumer prices. It reflects the U.S. economy’s average wage to normalize our years of earnings. It‘s done by indexing that puts our earnings in a comparative basis within the earnings level of the US by using the average wage indexing series. I have yet to find all the parameters used to get the actual index factor Social Security applies in our estimate against long past earnings years. Not surprising since it would change yearly as our estimate is always updated to be presented in today’s dollars.

4- Bouncing our AIME against PIA

The PIA is calculated using our highest 35 years of wage-indexed earnings and if we have less than 35 years then those missing years will be marked as $0 to make up 35 years. It is then averaged out and expressed as a monthly amount. That average amount is our AIME. Our AIME is then bounced against the PIA. Within our AIME amount the PIA applies a graduated percent of benefit. It goes from the lowest earnings bracket up to higher earning brackets. There are bend points within the PIA formula which represent earnings segments. The PIA formula gives 90% of our AIME for the first segment. Segment one is currently the first $826 of our monthly AIME. The next earnings segment between $826 and $4,980 is at 32% of AIME. High earners with AIME amounts above $4,980 get 15% of their AIME in the last segment.

For example, If our AIME is $5835. Then segment 1 is $826, Segment 2 is $4980, and Segment 3 is $29 ($826+$4980+$29=$5835). Our PIA bend point/earnings segment 1= $826 X 90% = $743. Bend point/earnings segment 2=$4980 X 32% = $1594. Bend point/earnings segment 3=$29 X 15% = $4. Total PIA benefit is then $743 + $1594 + $4 = $2341 per month.

Should Future Earnings of NONE Impact Our Social Security Estimate?

It’s easy to believe that having zero earnings going forward will impact our Social Security estimate. We are most likely earning far more later in our careers than we did some 35 years ago even after indexing. A pre-retirement estimate doesn’t consider retirement before collecting benefits. Basically the projection is optimistic before we retire by calculating that we will continue earning the higher later life earnings rate until our Social Security filing date. All those projected higher earnings years then override older lower earnings years. It actually says: *Retirement    You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until…

When I looked back 35 years from my early retirement year to 1975, my part-time earnings was $1002 that year. If I had $0 earnings going forward then that 1975 earnings would be counted as part of my 35 years for my AIME, not the last year’s reported earnings projection. Even when indexed that 1975 earnings amount should drag the Social Security estimate down once Social Security is calculated going to $0 income projected forward. I did accept that my actual Social Security benefit would be lower than what I looked at and used in my retirement planning before pulling the early retirement trigger. I just didn’t know how much.

High Income Earners

None of this may matter to anyone having 35 years of earnings above the Social Security earnings cap. The cap for maximum taxable earnings for recent years are –

• 2019 $132,900
• 2018  $128,400
• 2017 $127,200
• 2016 & 2015 $118,500
• 2014 $117,000
• 2013 $113,700
• 2012 $110,100

If you have 35 years of high earnings that surpasses the Social Security earnings cap, then you qualify for the maximum Social Security payment amount. For 2019 that is $2,861 a month at full retirement age.

How My Social Security Estimate with Zero Earnings Going Forward Turned Out

My Social Security estimate at age 51 when I retired early with 35 years employment earnings.

My estimate includes 2 years working part-time when I was in high school within my 35 year earnings history. But those and other lower earning years of my youth wouldn’t matter. There is a high projected forward earnings based on the last year of my career in the calculation for another 11 to 19 years (depending on benefit filing age) into the future used to get the displayed benefit payment amounts.

*Retirement    You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until…

your full retirement age (66 and 8 months), your payment would be about- $ 2,417 a month

age 70, your payment would be about……………………………………. $ 3,113 a month

age 62, your payment would be about……………………………………. $ 1,687 a month

Your estimated taxable earnings per year after 2010……….  $106,800

As of now I have a total of 42 years of social security recorded earnings because of some sweet retirement gigs. I did things I wanted to do and learn to do for only as long as I wanted to do it. The 7 years of retirement gig’s yearly earnings ranged from a low of $668 to the high of $107K. My best guess is that 4, maybe 5 of my retirement gig year’s earnings ended up higher than earlier indexed earnings years. That obviously should improve my Social Security calculated amount once $0 earnings (NONE) is used in the calculation going forward and my benefit is calculated solely on my highest 35 years earnings history.

Here is a comparative view of some of my early retirement Social Security estimates. It includes the projected earnings listed as part of the estimate calculation.

I found it interesting when comparing Social Security estimates and reviewing my lifetime of earnings

Of my total 42 years of working and paying into Social Security I had 11 years that paid out high bonuses which allowed me to hit the Social Security earnings cap. I do remember having a few Decembers in my first career when I got a take home pay bump because Social Security wasn’t withheld from my check until the new year. Also included are 13 earlier years where I worked 2 jobs so my wife could care for our kids. Childcare was too expensive even in the 80s so we did what we needed to do. Working 12 hour days boosted my income those years so we could make ends meet and later pay off debt. That helped increase my AIME during those years although it added zero earnings years for my wife’s Social Security AIME calculations.

When I retired early I used the FRA amount of my Social Security estimate in my retirement calculations.

Since I wasn’t retiring with a million in the bank I needed to make sure I could fund my early retirement the way I wanted to. I believed that my Social Security may end up a couple of hundred dollars less once it’s recalculated with $0 earnings going forward. I was OK with that and started my new retire early and often life. But between inflation adjustments and the way Social Security PIA bend points favor lower earning segments, I now find that my FRA benefit amount is a couple of hundred dollars higher. Understanding of course it isn’t apples vs apples. One estimate is presented in 2010 dollars and the latest in 2019 dollars.

Inflation aside, one might think it should be higher since I worked some awesome retirement gigs that replaced some low earning years of my youth. However, that Social Security estimate I pulled way-back-when before I retired projected high forward earnings right up to my benefit filing date, not NONE as it is now. Those old future optimistic earnings figures Social Security used would also override old lesser earning years in the estimate. It would override much more of them than my few years of retirement gigs and a future earnings of NONE going forward to my benefit filing date. Those retirement gigs probably do help with the new estimate but doesn’t fully explain the numbers now being provided.  

What can I say about the impact to my Social Security estimate with zero earnings projected forward —

Hard to completely figure it out without having the full wage indexing factors they used against the small earnings of years-past to calculate my AIME. I can say that the latest Social Security estimate with NONE earnings going forward is better than I was expecting. If we have 35 years of work earnings paid into Social Security before we retire early, that pre-retirement Social Security estimate we pull and run through the retirement calculator might be a lot closer to our benefit amount than we think it will be. Both because there will be no zero earnings years calculated in our AIME and there being a shorter amount of years to our benefit filing date used in the earnings forward calculation.

Anyone who pulls off early retirement in their 30s or 40s with less than 35 years paid into Social Security may find a different result. Especially since there will be a longer calculation to age 62 or older projected forward with their current earnings amount. A more accurate Social Security estimate may only happen after a year or two of lower earnings or NONE. When deciding to retire early, running your numbers with a reduced anticipated future Social Security payment amount should be considered.

I always believed a lower Social Security benefit was a good trade for early retirement and still do.

Social Security may or may not live up to the estimates they give us. I believe that since we are required to pay into it our entire working lives that it will meet its obligations, although possibly reduced. So much can happen with the markets and Social Security but we plan with the data we have. The future is unknown, so we should always add a little worst case scenario planning, just in case.