Many early retirees don’t include social security income in their retirement plans.
Why? Probably because the 4% rule doesn’t use it. It’s also not available until traditional retirement age.
Even so, social security income will cover a portion of your expenses in the later years. And the benefits can be significant.
There may be a lot of scrutiny regarding the current state of social security, but completely excluding it from your retirement planning might be a mistake.
What is social security?
Social security is a U.S. government program that was founded during the Great Depression.
The program was designed to provide a social safety net for people in retirement by effectively forcing them to save money during their working years. This is done through the social security tax. The current rate is 12.4%; however, employers typically cover half.
In return, workers receive a monthly annuity in retirement that is based on what they put into the system.
How do you earn benefits?
In order to qualify for full social security benefits, you must earn at least 40 social security credits during your working years. The number of credits earned depends on income, and you can earn up to four credits per year.
Many early retirees are high earners and able to meet the credit requirement in just ten years.
How much will you get?
The amount of your monthly benefit payments will ultimately depend on your earnings history and when you choose to begin taking the benefits.
The formula utilized to calculate benefits considers how much you earn. Social security is designed to replace a certain percentage of pre-retirement income, depending on your income levels. Additionally, it uses your highest 35 years of earned income.
You can begin taking social security as early as age 62, though your benefits will be reduced. Full retirement age for most people is age 67 or you can wait until age 70, for an even larger benefit.
To learn more about how social security works and calculate your estimated benefits, head over to the SSA’s website.
Should early retirees consider social security income in their retirement calculations?
The short answer is yes.
How to much to include will depend on your earnings history, the age you plan to retire, future income, and whether or not you plan on claiming social security early.
All of these factors will impact your estimated monthly benefit. Once you have an estimate, you’ll then need to determine how best to include this income stream in your retirement planning.
If you’re planning to retire in your 30’s, 40’s or even 50’s, you’ll need to pay for the first several years of retirement without the help of social security. But that doesn’t mean that early retirees shouldn’t factor social security benefits into their plans at all.
Will social security even be around by the time I’m eligible?
This is probably the number one concern younger generations have when it comes to social security. Myself, included.
It’s no secret that social security is paying out benefits faster than its coffers are growing. Experts currently estimate that, without reform, the trust fund will be depleted by 2034. However, the program will not run out of money entirely at that point, because it will still be collecting taxes from current workers.
Additionally, the government made a promise to retirees and future retirees. Any reform that eliminates, or significantly reduces benefits, will be tough for politicians to pass.
We clearly need reform. However, it is highly unlikely that early retirees who have paid into the system won’t receive any social security income.
According to recent projections, even without any significant reform, the program will still generate enough money to pay 79% of entitled benefits through 2090.
While I’d prefer to get everything I’m entitled to, 79% isn’t nothing.
How much social security income should I expect?
As mentioned earlier, your estimated social security benefits will depend on many factors, including the following: (1) your age; (2) your work and earnings history; (3) your future earnings; (4) the age at which you plan to retire; and (5) the age at which you expect to start taking social security benefits.
I’ll walk through my social security considerations in the example below. However, you can find (and adjust) your own estimate using the benefits calculator on SSA.gov.
My example
I recently used the SSA’s tool to determine my expected social security benefits. I also played with the assumptions to view how my benefits would change in different scenarios.
It’s important to note that the Social Security benefits tool isn’t designed for early retirees. It assumes that you will continue to earn income, at your current rate, until traditional retirement age. The earliest retirement date I could select was age 62.
This means that if you are planning to retire early, any social security estimates you’ve previously received in the mail were likely overstated.
Additionally, the calculation defaulted to using the last year in which I earned income ($46,000 in 2020) for the projected annual income. This surprised me, since my income last year was $0. I would have expected it to use the most recent year.
You can update the “average annual earnings,” but will need to keep these default assumptions in mind.
For simplicity, and in line with my original plans to never work again, I entered $0.
Here are my future expected annual benefits if I never earn another dollar of “earned income” (rounded for simplicity and privacy). For conservative purposes, I also calculated my benefit with a 79% reduction.
| Annual Benefit | Reduced Benefit | |
| Early Retirement (Age 62) | $16,000 | $12,640 |
| Full Retirement (Age 67) | $22,600 | $17,850 |
| Delayed Retirement (Age 70) | $28,000 | $22,120 |
Even with a reduced benefit, taken at age 62, social security income is not insignificant. $12,600 represents over 20% of our current expenses!
And that doesn’t even factor in Mr. RFL’s expected social security benefits, which will likely will be higher than mine.
How will we factor social security income into our early retirement plans?
I’m currently expecting that we will receive between $20,000 – $25,000 per year in social security benefits, after a 79% reduction to benefits and income taxes.
This is based on the assumption that we will claim my benefits at age 62. If we don’t need the money, we can always delay, but I prefer to err on the conservative side.
We plan to wait until full retirement age to claim Mr. RFL’s benefits. However, if we need money, lose faith in the program, or our health deteriorates, we’ll claim his early as well.
The 4% rule is a very simplified approach to determining your retirement needs. There isn’t a great way to factor in a deferred income stream, such as social security. And since you won’t have access to social security in the early years of retirement, some sort of adjustment is needed.
That said, the income is still valuable and will help to cover future expenses.
While we don’t include social security in our FIRE number calculation, it provides a buffer in case things don’t go as planned. This makes us even more confident that 4% is a safe withdrawal rate.
However, we do include social security in our detailed retirement planning spreadsheet which covers up to age 100 and serves as our gut check.
If you aren’t as nerdy as me, there are a number of free calculators available that allow you to factor social security into your retirement plans, such as Personal Capital (affiliate link).
Should early retirees delay retirement to boost social security income?
The short answer to this question is probably not.
It’s not that you shouldn’t work. You just shouldn’t work longer specifically to increase your social security benefits.
You shouldn’t need more money if you’ve properly planned for early retirement. That said, if you’re reached financial freedom and still feel like working for other reasons… go right ahead!
If you do decide to work for an extra year or two, or semi-retire, you will see an increase in your social security benefits. However, the boost may not be as big as you’d expect.
My example: Adding part-time work
Like most of the rabbit holes I’ve gone down, this one was prompted by a recent conversation. After talking to my parents about potentially going back to work part-time, my mom mentioned that it would be good for my social security benefits.
It got me wondering… how much would earning a little more income actually increase my social security benefits?
The answer is not much. At least, not enough to make social security a determining factor in whether or not I go back to work part-time.
I used the benefits estimator to play with several different scenarios to determine what the impact would be.
Scenario #1
The most likely scenario is that I would work part-time and seasonally for the next four years, until Mr. RFL retires. Doing so would net me around $80,000 in additional total earned income.
Divided by the 22 years (age 62 – age 40), this is an average projected income of $3,600 per year.
Here is the impact on my annual benefit:
| Original Benefit | New Benefit | Increase | |
| Early Retirement (62) | $16,000 | $16,200 | $200 |
| Full Retirement (67) | $22,600 | $23,000 | $400 |
| Delayed Retirement (70) | $28,000 | $28,500 | $500 |
Scenario #2
What if I worked full-time for another two years, or work part-time for more years, increasing that average income to $20,000 per year?
| Original Benefit | New Benefit | Increase | |
| Early Retirement (62) | $16,000 | $17,800 | $1,800 |
| Full Retirement (67) | $22,600 | $25,300 | $2,700 |
| Delayed Retirement (70) | $28,000 | $31,400 | $3,400 |
The increase to social security benefits is more significant in this scenario. However, it would also require more time working. There is always a trade off.
For me, this isn’t worth it. However, if you’re less confident in your FIRE number calculations, it may be something to consider.
Takeaway
While early retirees won’t be able to rely on social security income for all of retirement, it’s a valuable benefit that should at least be considered. Even if it’s just the added buffer that helps you sleep at night.
Have you factored social security into your early retirement plans?
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