What Happens to Your Social Security Payment if You Retire in Your 50’s?

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In this video, I show you what happens to your Social Security payment when you retire early.

Transcript:

• In this video, I tell you everything you need to know about what happens to your Social Security Payment if you retire before it’s time to collect. Coming up next, on Holy Schmidt!

• If you’ve been fortunate enough to arrange your life so that you are getting out of the race early, let me start off by saying congratulations.

• A lot of people who watch this channel will be envious of you

• But in a good way

• But a common question people have around this is If I retire, 5, 10, even 15 years before I am eligible to collect Social Security what happens to my payment?

• That’s a good question and frankly one that a lot of people wish they had asked BEFORE they left the workforce.

1. The SSA determines the qualifications and size of payments by how much you earned and how long you earned it.

1. When you look at your paycheck, there is a payroll tax called FICA which stands for Federal Insurance Contributions Act.

1. For most of you, this is a tax that is taken out of every paycheck and is your contribution to social security.

1. It works a little bit like a savings account.  If you only worked for a few years, your amount available in retirement is a lot less than of you paid this tax over your entire adult lifetime.

1. This point is really important for those of you watching who want to retire early. You will be contributing for less years than someone who works right up until retirement.

1. By the way, stick around to the end because I’ll bring it all together to show you how to maximize your payment.

1. FICA looks like a savings account in another way. Because it’s a payroll tax, the amount you pay into FICA tax each year is based on how much you earn each year.

1. The more you earn the more you contribute.

1. That’s why someone who earns $60,000 per year on average gets more than someone earns $30,000 per year, if they both worked the same number of years.

1. On the flip side for those of you who aren’t interested in maximizing your payment,

• and let’s be honest, who isn’t,

• you at least need to understand the “ticket to the game” and that “ticket” is Social Security Credits.

• To cut to the chase, for every 1 quarter of work where you earned more than the minimum you get 1 social security credit.

• In 2021 that minimum was $X,XXX, but that number would have been lower in the past. In other words it’s a pretty easy target to hit

• You need a minimum of 40 credits, i.e. a minimum of 40 quarters of work, to gain access to the Social Security program. 

• So step number 1 if you are retiring early is to check with the SSA to find out how many credits you have. You wouldn’t want to miss it by a few credits.

• Now the reason you came here.

• Over your lifetime, you earned varying degrees of income. If you are like most people, you earned less in your early years and more in your later years.

• The SSA needs to know one thing about all of that income stream in order to determine your payment. What was the average in todays dollars of all of your income.

• To do this they inflation adjust your earnings using the Consumer Price Index [CPI-W]. so they go back and multiply each year by the CPI-Index for that year.

• If you earned 30,000 in [1986] the index would have been about [2.3] so they’d say in today’s dollars your earned [75,000] in [1986]

• If it was [2006] the multiplier would be [1.6], etc. You get the point.

• Everything is converted to current day purchasing power.

• Once you have done this there is one final step. Take your best 35 years and discard the rest. If you don’t have 35 years of work history add zeros to get you to 35.

• Once you do that, add all 35 years up and divide by 35. This is your average lifetime earnings.

• It is this last point that is particularly problematic for someone retiring early because they will not have 35 years of work history, at least not 35 years of high earning work history.

• That’s the bad news. The good news is that if you can afford to retire early then you may have had some good earning years

• and the structure of Social Security pays you 90% of your first $996 dollars of average monthly earnings, 32% of the next 5006 dollars of average earnings, and 15% of the balance up to the yearly cap.

• These are called bend points and this one feature has made deciding about retiring early about other things besides getting the top Social Security Payment.

• Let me explain what I am talking about. You can see the math behind this on my website HolySchmidt.com/30

• 2021 Bend Points [update]

• First $996 = 90% contribution to monthly FRA amount
• $6002-$996 = 32% contribution to monthly FRA amount
• $6003+ = 15% contribution to monthly FRA amount

• If your last year of retirement after 30 years of work you made $50k, and your compensation had been growing at 2.5% per year in today’s dollars, then your average monthly income would have been $2534

• If you continued to work for the last 5 year to get to the magic number of 35 years, then your average monthly income would have grown to 3175.

• So your average monthly earnings at 30 years is 80% of what it would be at 35 years.

• If you run 30 years through the bend points you get

• 996 X 90% = 896
• $1538 x 32% = 492
• Total = 1388

• If you run 35 years through the bend points you get

• 996 X 90% = 896
• $2179 x 32% = 697
• Total = 1593

• So your average monthly full retirement age payment at 30 years is 87% of what it would be at 35 years.

• This is because the higher your average monthly earnings the less valuable the additional earnings become.

• Now what if you did really well, you earned $140,000 after 30 years. Your average monthly payment, assuming you had received the same 2.5% increases per year would be: 7095.

• If you had waited the full 35 years then then average, 8891.

• So the 30 year average monthly earnings is 80% of the average monthly earnings after 35 years just like before.

• If you run 30 years through the bend points you get

• AVERAGE MONTHLY EARNINGS = $7095
• 996 X 90% = 896
• $5006 x 32% = 1602
• 1093 x 15% = 164
• Total = 2662

• If you run 35 years through the bend points you get

• AVERAGE MONTHLY EARNINGS = $8891

• 996 X 90% = 896
• $5006 x 32% = 1602
• 2889 x 15% = 433
• Total = 2931

• Your actual Social Security payment at 30 years is 91% of 35 years and even though your average monthly earnings 1799 more,

• what social security pays you is only $269 more because of the third bend point…

Check out this video on how to calculate your own Social Security Payment in 3 easy steps.