I wrote this post in 2012 to find out how early retirement affects 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 decreased, but my happiness increased greatly. After 12 years of early retirement, I’m happy to report that I have absolutely no regrets.
My income has been going down for the past few years. That’s unfortunate, but it’s all part of the strategy. I work part time so I make less money. However, my limited Social Security benefits are stable. I’ve worked enough years that the extra money won’t affect the benefits that much.
That’s right, we’ll quickly review how Social Security benefits are calculated. Then we’ll review 3 scenarios to see how early retirement affects Social Security Benefits.
Social Security Summary
In the United States, Social Security is the government’s Old Age, Survivors, and Disability Insurance (OASDI) program. Social Security is funded by taxes and is intended to be a safety net for all qualified workers. We will focus on the “Old Age” or retirement portion of the program today. Not everyone is eligible for Social Security retirement benefits. These are important things to know about Social Security.
- First, you need 40 credits to qualify for Social Security. You can earn up to 4 credits per year. Almost all Americans earn enough to earn these 40 credits in their working life.
- I profit (Primary Insurance Amount or PIA) is calculated from your average monthly income indexed (AIM.) This takes yours the highest earning age is 35 and estimates them on monthly income. Once you have an AIME, the benefit is calculated using the following formula*.
- A) 90 percent of the first $1,226 of his indexed monthly salary, and
- B) 32 percent of his AIME is over $1,226 to $7,391, and
- C) 15 percent of his average reported monthly earnings over $7,391.
*Updated for 2025. These numbers change every year to reflect inflation.
Bend Points
The graph below shows the “Turnover Points of the Profitability Formula.” You can see if you earn more, you will receive more Social Security Benefits in retirement. However, the benefits are diminishing.
Social Security will help more if you do less. If yours AIM about $1,226, then PIA (Social Security Benefits) will replace 90% of your salary. As the AIME grows, the benefit covers a smaller percentage of your income. So if your AIME is $10,000, you will receive $3,468 or 34% of your average monthly income. In 2025, the maximum amount of Social Security benefits you can receive if you file at full retirement age (67) is $4,018.
This sounds about right to me. Low-income families need more help in retirement. High earners can save more in their retirement accounts and don’t need as much help.
I also added where Mrs RB40 and I are on this graph. We both have over 40 credits and qualify for Social Security Benefits. We will dig deeper into those 2 points next.
Early Retirement Affects Social Security Benefits
Social Security is less uncertain for my generation because the program will begin to run out of money in 2035. If Congress doesn’t change the plan soon, we could get less than the full benefit. Unfortunately, I think Social Security reform is going to be very difficult. Congress can do nothing. It’s funny. They will continue to kick the can down the road and we will all pay the price one day. It really shouldn’t be that hard to fix. If we raise the Social Security tax limit, the Social Security trust fund should live longer. The retirement age probably also needs to increase. People are living much longer these days. However, we will join the Congress in burying our heads in the sand and ignore this looming crisis for now.
*In 2025, you pay social security taxes on up to $176,100 of your earnings. I think we should raise this end to $1,000,000.
If you listen carefully to the above recap, you will see that early retirement will reduce your Social Security benefits. Retiring early means you’ll miss out on your prime earning years. This will reduce the AIME, the average of your highest earning age of 35. I quit my engineering job at 38 and I haven’t had 35 years of salary. By the end of 2023, I have 30 years of earnings under my belt. That means there are 5 years ZERO salary I pull down my AIME.
My current AIME is 30 years of earnings divided by 35.
- Joe’s AIME = $7,386 (Past earnings are adjusted for inflation by index factor.)
Fortunately, I have made some money blogging for the past 12 years. My income is going down a bit, though. Here is our Social Security Income Tax Chart.
Mrs. AIME RB40 is down. He has been earning for 29 years, but he earned less when we were young. Today, he makes a lot more money than me, but it will be many years before his AIME catches up to mine.
- Mrs. RB40’s AIME = $5,536
Now let’s test a few scenarios and see how our benefits will be. I will use the online calculator at ssa.tools.
Scenario 1: Full retirement now = $3,074/month at 67
If I stop working now and have no income, my benefits will be $3,074 at age 67. This is the blue dot in the chart below.
I headed for the second bend. This is a beautiful place. I worked enough to get good benefits. If you go past the second inflection point, the benefits don’t grow much.
- Mrs. RB40 will receive $2,482/month at 67 if she quits now. Here is a chart that says no more future income. Mrs RB40 is a little behind, on the green dot.
Part-time Self-Employment for 5 years plus: $3,093/month
My online income has been declining, but I hope to earn $10,000/year for 5 more years. When RB40Jr (our son) goes to college, I plan to stop working completely so we can travel and relax more. In this scenario, I deposit $10,000/year from 2024 to 2029. Then I will have no income after that. Estimated future income takes up a lot of space $0 leading age in AIME calculations. It didn’t make much of a difference because my prime years were already gone. The next few years will have little impact on my Social Security benefits.
My estimated benefits will increase to $3,093/month. That’s an increase of less than $20/month from the previous situation. That’s a very small increase in another 5 years of work!
Another 5 years of work will have a big impact on Mrs. RB40. His estimated benefits increase to $2,978 per month. That’s a 30% increase. He is in his prime years now. The next few years will significantly increase AIME and Social Security benefits.
Part-time Self-Employment 16+ years: $3,095/month
What if I continue to work part-time until I’m 67? (16 more years.) That would increase the estimated benefits by just $2/month. It’s not worth it.
This increase is small because long-term operation will not significantly change the AIME. In the previous case, I already had 35 years of steady income. Also, I do very little these days. Unless I make a lot of money, working longer hours won’t affect my Social Security Benefits much.
- Working for 16 more years would make a big impact on Mrs. RB40. His benefits will increase to $3,448 per month. That’s a nice bump.
A Different Situation
| The situation | Joe’s Social Security benefits | Mrs. RB40’s |
| Stop working now | $3,074 | $2,482 |
| to work until 2028 | $3,093 | $2,978 |
| to work until 2040 | $3,095 | $3,448 |
This spreadsheet shows how early retirement affects Social Security Benefits. If you retire before 35 years of service, it will hurt your benefits. Also, my highest earning age was in my 30s. Working harder now won’t make much of a difference.
In contrast, the years of Mrs. RB40 is in his 50s. In his case, working longer hours will greatly increase his Social Security Benefits.
Now that I know all this, does it change my mind about early retirement?
Of course not, life is good in early retirement. Even if I stop working today, I will still receive $3,074 in Social Security retirement benefits when I turn 67. It’s not bullying at all.
Mrs. RB40 should also receive $2,482 in 67 benefits if he quits now. That’s an extra $5,557 a month for our family. It should cover our basic living expenses. If we keep the lifestyle very low, we should be good. Mrs. RB40 is not quite ready for retirement yet so I will update this every year.
In the meantime, we will continue to work to increase our revenue. If our income consistently exceeds our expenses, then we are set. Any Social Security Benefits will be key. My father-in-law uses Social Security Benefits as a contribution fund. I would like to do the same when we are 67. That’s a good idea.
Have you checked your Social Security statement lately? Are you relying on it to pay for your retirement?
If you’ve made it to the end, go check out this post – Are you worth more than what you’ve earned? You already have the data to gain so you might as well find out that you are worth more than what you have earned.
*Sign up for a free account on Empower to help manage your investment accounts and balances. I log in almost every day to check my accounts and cash flow. It’s a great site for DIY investors. Manage your finances so you don’t have to rely on Social Security in your old age!
Photo by Marc Szeglat
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A minimum wage is the key to early retirement. This year, Joe is investing in real estate with CrowdStreet. They have many projects all over the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools to help you achieve financial independence.
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