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How Early Retirement Impact Social Security Benefit

How early retirement impacts Social Security benefits

I originally wrote this post 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, but my happiness increased tremendously. After 11 years of early retirement, I’m happy to report that I have zero regrets.

My income has been trending lower over the last few years. That’s unfortunate, but it’s all part of the plan. I work less so I make less money. However, my Social Security estimated benefits have stabilized. I worked enough years that more earnings won’t impact the benefits that much.

Okay, we’ll quickly review how the Social Security benefit is calculated. Then we’ll go through 3 scenarios to see how early retirement impacts Social Security Benefits.

*There is a great online calculator from the I’ll show you how to use it when I go over the calculations.

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 qualifies for Social Security retirement benefits. These are important things to know about Social Security.

  1. First, you need 40 credits to be eligible for Social Security. You can earn up to 4 credits each year. Almost all Americans earn 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 $1,115 of his/her average indexed monthly earnings, plus
  • B) 32 percent of his/her AIME over $1,115 to $6,721, plus
  • C) 15 percent of his/her average indexed monthly earnings over $6,721.

*Updated 2023. These numbers change annually to reflect inflation.

Bend Points

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

We can see that Social Security will be more helpful if you make less. If your AIME is about $1,115, then the PIA (Social Security Benefits) would replace 90% of your income. As the AIME increases, the benefit covers a smaller percentage of your income. So if your AIME is $10,000, then you’d receive $3,289 or 33% of your average monthly income. For 2023, the maximum amount of Social Security Benefits you can receive if you file at full retirement age (67) is $3,624.

This sounds about right to me. Lower-income households need more help with retirement. High-income earners can save more in their retirement accounts and don’t need as much assistance.

I also added where Mrs. RB40 and I are on this graph. We both have over 40 credits and are 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 2033. If Congress doesn’t reform the program soon, we may receive less than full benefit. Unfortunately, I think Social Security reform will be extremely difficult. Congress 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. It really shouldn’t be that difficult to fix. If we raise the Social Security tax limit, the Social Security trust fund should survive much longer. The retirement age probably needs to increase as well. People live a lot longer these days. Anyway, we’ll join Congress by sticking our heads in the sand and ignoring this looming problem for now.

*For 2023, you pay social security tax up to $160,200 of your earnings. I think we should raise this cap to $1,000,000. 

If you paid close attention to the recap above, you would see that early retirement will decrease your Social Security benefit. Retiring early means you will miss out on your prime earning years. This will reduce the AIME, the average of your 35 highest earning years. I quit my engineering career at 38 and I don’t have 35 years of earnings yet. At the end of 2022, I have 29 years of earnings under my belt. That means there are 6 years of ZERO earnings dragging my AIME down.

My current AIME is 29 years of earnings divided by 35.

  • Joe’s AIME = $7,035 (This is an estimate because past earnings are adjusted for inflation every year via the indexing factor.)

Luckily, I made some income from blogging over these last few years. Here is the chart of our Taxed Social Security Earnings.

Mrs. RB40’s AIME is a bit lower. She has 28 years of earnings, but she had less income than I did when we were young. Today, she makes way more money than I do, but it will take a few more years before her AIME catches up to mine.

  • Mrs. RB40’s AIME = $5,002

Now let’s go through a few scenarios and see how our benefits will turn out. I’ll use the online calculator at

Scenario 1: Full retirement now = $2,932/month at 67

If I stop working now and have no more earned income, my benefits would be $2,932 when I’m 67. This is the green dot on the chart below.

This PIA is somewhat low here because I have 6 years with no earnings. Remember, I only have 29 earning years up until today. The AIME calculation sums up your highest 35 earning years and averages them out. The 6 zero-earning years drag down the average.

  • Mrs. RB40’s will receive $2,286/month at 67 if she stops working now (blue dot). She is closing in on the second bend point.

Part-time Self Employment for 6 more years: $2,988/month

My online income has been unstable, but I hope I can make $20,000/year for 6 more years. Once RB40Jr (our son) goes off to college, I plan to stop working completely so we can travel and relax more. In this scenario, I input $20,000/year from 2023 to 2029. Then I won’t have any income after that. The $20,000/year replaced many of the $0 earning years in the AIME calculation. It doesn’t make a big difference because my prime earning years were already in the past. The next few years will have minimal impact on my Social Security Benefits.

My estimated benefits would increase to $2,988/month. That’s just 2% more than if I stop working completely right now. That’s very little increase for 6 more years of work! I already crossed the second bend point.

  • 6 more years of work would make a huge impact for Mrs. RB40, though. Her estimated benefits increase to $2,946 per month. That’s a 29% increase. She is in her prime earning years now. The next few years will substantially increase her Social Security Benefits.

Part-time Self Employment for 17 more years: $2,995/month

What if I continue working part-time until I’m 67 (17 more years.) That will increase the estimated benefits by just $7/month. Wow, that’s negligible. It doesn’t seem worth it.

This increase is minimal because working 14 additional years won’t change the AIME much. In the previous scenario, I already have 35 solid earnings years. Adding more part-time work at that point won’t increase the average much.

  • Working for 20 more years would make a bigger impact for Mrs. RB40. Her benefits would increase to $3,301 per month. That’s a good increase, but 17 years is a long time.

Different Scenario

Scenario Joe’s Social Security Benefits Mrs. RB40’s
Stop working now $2,932 $2,286
Part-time work until 2028 $2,988  $2,946
Part-time work until 2040 $2,995  
Full-time work until 2040 $3,301

This spreadsheet clearly shows how early retirement impacts Social Security Benefits. If you retire before working for 35 years, it will hurt your benefits. Once you have worked for 35 years, working more won’t have a big impact.

Now that I know all this, does it change my mind about early retirement?

Not at all, life is fantastic in early retirement. Even if I stop working completely today, I’d still receive $2,932 in Social Security retirement benefits when I turn 67. That’s not bad at all.

Mrs. RB40 should also receive $2,286 in benefits at 67 if she stops working now. That’s $5,218 per month extra for our household. It should cover our core living expenses. If we keep lifestyle inflation down, we should be good. Mrs. RB40 isn’t quite ready to retire yet so I’ll update this annually.

Meanwhile, we will keep working to increase our passive income. Once our passive income surpasses our expenses 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. I think that’s a great idea.

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

If you made it to the end, go check out this post – Are you worth more than you earned? You already have the earning data so might as well figure out if you’re worth more than you earned.

*Sign up for a free account at Personal Capital to help manage your investment accounts and net worth. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY investors. Take charge of your finances so you don’t have to depend on Social Security in your old age!

Photo by Marc Szeglat

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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