Social Security and Early Retirement: Know Your Bend Points!

Social Security is something we aspiring early retirees don’t spend much time talking about.

While we may notice how much we’ve kicked in ($7,886.40 from me and $7,886.40 from my employer this year), we tend to largely ignore it when calculating safe withdrawal rates and our annual cashflow. If we mention it all, it’s usually with an asterisk because it’s so far off and somewhat uncertain.


In all likelihood, some money will be there. The calculations may be different than they are today, but that’s true anytime we make projections based on current tax code, and that’s something we do a lot.

Based on last year’s annual report from the Social Security Board of Trustees, the program is fully funded through 2034, and three quarters funded for the long term with many options to address the long term shortfall. Politics will play a role in deciding if that means decreased benefits, an older age at which they’re available, or an increase in the amount of salary subject to Social Security tax.

While we don’t know which way it will go, and it’s quite alright to plan as if it doesn’t exist (better safe than sorry), the reality is that Social Security will quite likely be a benefit to many of us in the latter portion of our early retirement (otherwise known as ordinary retirement).

 

Social Security and Early Retirement

 

There are some early retirees who should not plan on Social Security income. If you earned your money outside the U.S. and did not pay into the system, you’re out. If you failed to earn income for 10 years (40 three-month quarters of at least an inflation-adjusted $1,300 income), you’re not eligible. However, non-qualifying spouses married to someone who qualifies for Social Security can receive half their spouse’s benefit if taken at full retirement age (FRA).

If you are considering an early retirement, I would strongly encourage you to aim for at least ten years of contributions to the system. Note that these don’t all necessarily have to be completed prior to pulling the FIRE trigger. If not, you must plan on having at least some reportable income whether from a hobby job or self-employment of some kind until you’ve hit your forty eligible quarters.

 

Know the Social Security Bend Points!

 

What are these bend points? They’re the two points at which you receive diminishing returns in your monthly benefit once you’ve earned a certain amount of money.

The money you’ve contributed over the years is used to calculate your Average Indexed Monthly Earnings (AIME). It’s an inflation-adjusted average of your monthly earnings over your most lucrative 35 years. If you work and contribute for fewer than 35 years, zeroes fill in the blanks.

I’ll have a calculator for your AIME below, but essentially it’s your total inflation adjusted earnings divided by 420. What’s the significance of 420? In this case, it’s simply the number of months in 35 years. AIME is important in determining your monthly benefit when taking Social Security at full retirement age.

 

You get 90% of your AIME up to the first bend point (at an AIME of $885 in 2017)

You get 32% of your AIME between the first and second bend points ( portion of AIME between $885 and $5,336 in 2017)

You get 15% of your AIME beyond the second bend point (AIME above $5,336 in 2017)

 

For visual learners, let’s use my middle finger as an example. Might as well throw in a couple joints to accompany all this 420 talk.

The initial rate of rise is quite steep until you reach the first bend point (represented by my proximal interphalangeal joint). The slope is less steep between the first and second bend point (my distal interphalangeal joint), and it doesn’t rise all that much beyond the second bend point.

 

middle finger bend points

my first and only gig as a hand model

 

Clearly, building up your AIME to the first bend point at $885 is worthwhile. For every dollar up to $885, you’ll get 90 cents per month when you take Social Security at full retirement age (67 for those of us born after 1959). If you’re earning enough ($127,200 or more in 2017) to contribute the max to Social Security, you’ll hit the first bend point in a few short years.

Earning beyond the first bend point doesn’t do nearly as much for you, but you still get 32 cents for every dollar of AIME between the first bend point and the second at $5,336. Additional years of income between the bend points will make a noticeable difference in your eventual monthly benefit.

Once your Average Indexed Monthly Earnings reach the second bend point at $5,336, you’ll only receive 15 cents per dollar of AIME beyond that. Additional earnings give you vastly diminished returns at this level of AIME.

The bend points will increase annually with inflation, as will your AIME as older earnings will be worth more as time goes on.

 

Let’s Math.

 

Every time I create a new calculator, I learn some new spreadsheet tricks. This was perhaps the most labor-intensive one I’ve made thus far, but I think you’ll love it.

I’ve entered my information in the gray boxes, copied and pasted directly from the ssa.gov website. You can sign in or create an account here to access a lifetime record of your earnings. You can also find out what your anticipated monthly benefit (known as Primary Insurance Amount or PIA) will be if you continue to work at your current pace until age 67.

I’m assuming you probably won’t do that.

I’ve created a calculator that will tell you whether or not you’ve reached the first and second bend point and will estimate your monthly benefit if you were to stop contributing now. To extrapolate further, each additional year working and contributing the max will add about $303 ($127,200 / 420) to your AIME.

This calculator is accurate for those of us born after 1960. The benefits will be slightly higher for our friends born before JFK became president — see this table for adjustments here.

These are my numbers. I had some grocery store and self-employment income before I started making big money as a resident in 2002. From 2006 to 2017, I’ve earned and contributed the max for twelve years of maximum earnings. Just 23 more quick years, and I can collect the biggest check possible!

 

 

As you can see, with an AIME of nearly $4,000, I’ve easily surpassed the first bend point, but I’m just over $1,300 from the second bend point. Another year or two as an anesthesiologist and I’ll be getting closer, but in all likelihood, I’ll leave clinical medicine behind prior to reaching the second bend point.

If I continue to earn some income to reach that next bend point, that would be ideal, but at 32 cents on the dollar, I’m not all that concerned with growing my AIME. I’ll be even less enthused after that second bend point milestone is reached and an additional dollar of AIME is worth 15 cents in my monthly checks.

 

Calculate Your Social Security

 

I’ve created a page for you to enter your own numbers here on the 2017 Social Security Calculator, although it may be easier to simply download the calculator along with the rest of the calculators I’ve created for you. If you’re not a subscriber, sign up and you’ll receive a link. Subscribers, check the e-mail you received this morning for an updated link.

 

 

Our Plan for Social Security

 

Taking Social Security as soon as it’s available at age 62 results in a 30% penalty. I don’t like 30% penalties. Thatโ€™s out.

At full retirement age, I get 100% of my calculated benefit. But each year that I hold off nets me an additional 8% per month for life. Unless I find myself in poor health, the smart money’s on the most money. I plan to delay my benefit until age 70.

Currently, doing so would give me about $26,000 a year, but with just a couple more years of max contributions, the AIME jumps by $600 and I’m looking at a benefit closer to $30,000 a year.

The max I could receive from an additional 21 years of work beyond that is about $43,000 per year according to the government website. That’s a gain of about $620 per year for each additional year worked. You’ve heard of golden handcuffs; these are papier-mรขchรฉ handcuffs. Know your bend points!

My wife has done a lot of hard work, but most of it has gone unrecognized by the Social Security Administration. Obviously, the SSA has never had to clean up after me or my kids. But not all hope is lost.

 

blond boys playing

 

As mentioned earlier, if she doesn’t qualify with 40 quarters, or if her benefit would be less than half of mine, she can file for Social Security at full retirement age and receive half of my FRA benefit as long as I’m around and my full benefit if I happen to leave this world before her. There is no benefit to postponing to age 70 for a spouse claiming spousal benefits.

Between the two of us, we will potentially receive checks that add up to about $40,000 a year in today’s dollars, which is about half of our anticipated retirement expenses. Granted, we’re about three decades away from that eventuality, but it never hurts to think ahead.

 


You’re still not using Personal Capital? Track all your accounts in one place like I do.


 

What’s your plan for Social Security? Have you passed the first bend point? The second? Let us know below!

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50 comments

  • This is another example of the progressive design of our financial system (tax code and government benefits). As you’ve written about previously, the marginal tax rate gets so high at the high-income tax brackets that it may de-incentivize people from working more.

    To be fair to the government, though, you only pay taxes on your first $118,500 in income for 2016 ($127,200 for 2017). So by making significantly more than the Social Security income cap over a shorter, ~10 year career, you were able to get the same Social Security benefits as someone who makes $100,000 over a 35-year career (who paid much more of their income in Social Security taxes). Well played, PoF ๐Ÿ˜‰

    • Well, not the same, but if I get to the second bend point, it will be close enough.

      On the other hand, condensing earnings into a shorter period of time, I pay much, much more income tax than the person who earns $100,000 per year for 35 years.

      Earning $350,000 for 10 years, you could pay close to $1 million in federal and state income tax, depending on the state. Spread that $3.5 million out over 35 years, and you might pay a few hundred thousand, but certainly less than half of the high earner.

      Best,
      -PoF

  • Wow, this is really interesting! I knew some basics of Social Security, but I really like the comprehensive breakdown here. I look forward to crunching my own numbers, thank you for posting and sharing the calculator!

    • I thought it was a worthwhile exercise. The SSA.gov website gives you an estimate of what your benefit will be if you continue earning at your current rate until FRA (67 for me), but doesn’t do a great job of letting you know where you stand currently.

      Cheers!
      -PoF

      p.s. picked up some Right Brain, North Peak, Shorts, and more to take home when I was up a the tip of the mitt recently.

  • I entered my numbers on your spreadsheet from the hard copy SSA document that I got in the mail last fall. When you near the big “5-0” this is one of the “gifts” you get (in addition to many copies of your AARP card!) I’ve reached the first bend point too, but since I’m leaving full-time work this Friday – that’ll be all the bends I get! My husband will be 59 this year, so we’re getting closer to SS being a decision we’ll have to make. We need to do a lot more research in the next couple of years and posts like this are being bookmarked for that purpose. Thanks for sharing and I’m looking forward to the comments here.

    • I’m somewhat surprised you haven’t hit the second bend point, but with an educator’s pension, you guys should be in great shape, regardless.

      In general, delaying will give you the largest benefit unless you don’t expect to live long after 70. If a spouse is going to take the 50% spousal benefit (not your case), it can become even trickier.

      Best,
      -PoF

      • bob r

        Spouse “A” can only claim a 50% benefit if Spouse “B” is already collecting Social Security (they closed the file-and-suspend “loophole” recently). So your spouse can claim (50%) at 66 and you at 70 (132%) only if the spouse is three or more years younger than you. Otherwise, the spouse has to wait until YOU file to get the spousal 50%. That’s my story — we are the same age and my delay until age 70 will limit her to claiming her own SS (lower than 50% of mine), which she will do; then when I start at 70, she will file for the spousal benefit.

  • I just assumed SS wouldn’t be there when I could take advantage of it so never dedicated any time to learning about it. This is good to know at least. Thanks PoF!

    • The good news is that the shortfall is easy to fix. Did you notice the amount you’re taxed on jump from $118,500 to $127,200 in one year?

      A few more $8,700 jumps and the funding issue is solved.

      Another problem is the increasing roles of people making the move from welfare to SS disability. There are actually companies contracted to get people converted and are rewarded monetarily by state governments for each person they get off of welfare and into disability. I heard it on NPR a few years ago and was thoroughly disgusted. Of course, some physicians are complicit in this scheme.

      Best,
      -PoF

  • VagabondMD

    My AIME is $6965, well past the second bend on the curve, with 35 plus years of earning. Any additional work years as a doc will replace very low earnings years of adolescence but probably will not move the needle all that much toward actual retirement benefit.

    This has been a very useful tool for me. Thank you for doing it. I previously estimated the benefit, with a number somewhat pulled from air, somewhat calculated from the ssa.gov site, but now I have a better idea what the actual number will be. (My guess was pretty close!)

  • Greg

    Thank you for the post and Excel spreadsheet. Extrapolating the benefit of future contributions prior to possible early retirement shows that for each additional year of work I would only add about $439 to the annual social security payments. Adding $10,975 to my retirement nest egg would generate the same income at a 4% SWR.

    Working adds to the nest egg and adds to social security benefit so it is not an either-or choice. But, as you pointed out, working just for social security benefit is a poor investment.

  • Adam

    Great article! I really like the calculators.

    I did notice a couple of typos in the Social Security tab of the calculator spreadsheet:

    Cell E75 is: =IF(E69>5536,E69-5536,0)
    Cell E75 should be: =IF(E69>5336,E69-5336,0)

    Cell G80 should be: 80%

  • Very cool PoF. Will download the tool to see how the numbers for Mr and Mrs PIE compare to the summary projections spat out at us over at ssa.gov.

    Here’s to a healthy retirement and none of those interphalangeal joints becoming arthritic and bending permanently too far. Those pro-inflammatory cytokines (TNFalpha, IL-6 and IL-1) will get your joints and your SS projections. Bet you didn’t expect to see that type of comment in a SS post! Your readers will be scared away by this sort of stuff from me…. :>)

    • You joke about tumor necrosis factor and interleukins, but many people I know who retire in their fifties and sixties are sadly quite limited by arthritis.

      I still want to be able to run, climb, bike, ski, etc… and do it all as a retiree long before I collect Social Security.

      Cheers!
      -PoF

      • Indeed. Spending the last 20 years working on therapeutics to alleviate diseases such as RA, PsA and OA, I know the challenges and unmet medical need all to well. When I pull the plug, will be able to speak more about what my company and my teams specifically contributed to that endeavor. It is brutally hard yet great strides have taken place, which is the rewarding part of our teamwork with research scientists, clinicians and most importantly the patients.

  • Nice post. I had not given this much thought but recently my mother was debating whether to take SS early (she is 62). She deferred for now.

    The more I read the more I lean towards her taking funds early. My dad has earned more in his life and is 12 years older then her. Chances are he will pass before she does and in that case she will get his full SS payments. So now I am leaning towards her taking the SS payments at age 63. Thoughts?

    • That’s a tricky one. Full retirement age for her would be 66 (or 66 & 2 months) and he’ll be 78 then. If he is in relatively poor health, it would make sense for her to take benefits sooner than later.

      If he’s healthy for his age, this might be a job for a spreadsheet. Good luck!

      Best,
      -PoF

  • Interesting. I conceptually got the cutoffs and that bend points existed but I’ve never seen the actual points as written. While unlike some I do believe social security will exist when I retire. I expect benefits will change before I retire, potentially changing the bend points.

  • It’s a shame that something intended to help the poor and be a safety net is so dang complicated!
    Thanks for your spreadsheet. It definitely adds another layer of thought to our RE date.

    • For most of us, Social Security is the closest thing to a pension we’ll see. Might as well try to get the most of it if you find yourself shy of the 2nd bend point.

      After that, the additional benefit from increasing AIME is less than half what it was prior to the 2nd bend.

      Cheers!
      -PoF

  • Good stuff PoF! I just wanted to point out that this isn’t completely accurate: “If you failed to earn income for 10 years (40 three-month quarters of at least an inflation-adjusted $1,300 income), youโ€™re not eligible.” You do need to earn 40 credits, but it doesn’t have to take a full 10 years to do so. The smallest amount of time you can earn your credits is 8 years and 2 months – you are limited to 4 credits a year, but you can earn all 4 credits in a single month. Source: me. I qualified for SS in 8 years and 4 months (I haven’t even been in this country for a decade yet!).

    • You’re right — the US government has some wacky definitions. A three-month quarter is the equivalent of earning about $1,300. If you earn $5,200 in a day, you’ve got a year’s worth of SS earnings knocked out.

      Technically, you could qualify with only 10 days of earnings, as long as they are lucrative days in 10 different calendar years.

      Cheers!
      -PoF

  • Even early-retired I’m passed the second bend point. Additional working years wouldn’t add very much at all to my benefits. But I’m also not banking on it. If it’s still available when I hit 70, then I’ll take it and start partying. ๐Ÿ™‚

  • Nice post on a topic that isn’t covered much for early retirees. What is nice is that so much of the benefit occurs early in your working career, especially if you have a high income. So even if you retire early, you’ll still get a good portion of your SS benefits (in whatever form they exist at the time).

    I have enough “golden handcuffs” angst with my job. I’m glad SS is so progressive that there is little benefit to working much beyond 10-15 years.

    I simply forget it in my plans (like many seem to do) and consider it free financial longevity insurance in my old age in case I need it.

    • Thanks, SIBF.

      I don’t necessarily forget it, but I don’t think about it much. I don’t anticipate taking a penny from it in the first 25 years of FIRE, so it feels pretty abstract.

      I know it’s theoretically possible and even probable, like the Vikings winning a Super Bowl someday, but I’ll believe it when I see it.

      Cheers!
      -PoF

  • Thanks for breaking this down. I’ve never focused a whole lot on SS, which you point out is a fairly typical thing for people like us (FI/FIRE). But I agree that we’ll have something in some form, whether it’s SS or UBI (universal basic income). A lot of younger folks think that SS will be history in 40 years’ time. But again, I think we’ll have something. It would be ridiculous not to. Given that most people won’t have much saved up for retirement (personally saved up). I’ve also never thought about “bend points.” I knew there were diminishing returns at some point, but never did the research. Again because I don’t really think much about SS.

    • Thanks, TK.

      I was somewhat familiar with the Bend Point concept, but had never done the math for myself. I had been putting off writing this one, because I knew it needed a calculator, and that would require a big effort, but it was well worth the time.

      Cheers!
      -PoF

  • I love this calculator and the explanation. We’re still over 30 years from standard retirement age, so we’re assuming it won’t be there. Realistically, I think something will be there, but I would rather save too much earlier when I have more compounding time working for us. We have plenty of time to reevaluate how much social security will be available as we get older. Worst case, we are fine. Best case, we can retire earlier or with more wealth.

    • Most of us look at it as icing on the cake.

      The fact is, for an early retiree, the amount of money you’ll have in your sixties and seventies depends much more on total return and sequence of returns, but it’s comforting to know that some significant money should be there some day.

      Cheers!
      -PoF

  • Nice write up PoF. I looked into this a couple of years ago and realized I was pretty close to the second bend point. For the vast majority of docs, they will be well past the second bend point by the end of their career. It’s important to get enough credits, and working up to at least the first bend point is high return on investment.

  • The last time I looked, I was pretty close to the second bend point, but not quite there yet. With my current income, I don’t think there would be much progress from 2 years ago.
    Nice spreadsheet, though. I will input my numbers today.
    Yeap, I look at it as icing on the cake too. Unless I die early, then the benefit will be very helpful for my family.

  • This post didn’t quite bend me out of shape, POF, so thanks for doing this. ๐Ÿ˜Š With significant part of my earnings history outside US, I knew I wouldn’t reach the second bend point. My SS earnings record has pegged me at $15K benefit per year when I turn 67, but I have considered only $10K/yr SS in my financial plan considering we may receive only 75% of benefit amount if Congress does nothing. Still, this is a decent sum and reduces my portfolio WR so am happy to get it, but I am not quite looking forward to turning 67 though yet ๐Ÿ˜จ

  • hatton1

    I think as you get older the numbers ss sends you are more accurate. I will put my numbers in on my 4 day weekend. I am pretty sure I am beyond the second bend. I also have finally eliminated all the zero years when I did not have job in med school.

  • Dan

    PoF,
    Have you considered the advantage of claiming at 62 (with the 30% reduction of benefits) but investing the funds rather than consuming them? Actuarially speaking, the benefit value should be equivalent (over your lifespan) but you protect yourself against an accidental/premature death risk. That is, if you are in great health and expect to live to 100 and delay benefits until age 70…but, you get hit by a car at age 69, you (and you heirs) missed out on 7 years of SS benefits that is not replaced. Seems like an unnecessary risk of leaving as much as $105,000 on the table. Am I wrong?
    Dan

    • It’s designed to be more or less a tossup. Taking it early is a bet against yourself (as is insurance). Based on genetics and reasonably healthy living, I’m guessing I’ll outlive the actuarial table and if I’m right, postponing will win.

      According to this article from Time, 80.5 is the break-even point.

      Cheers!
      -PoF

      • Dan

        Thanks for the reply…and sure, 80.5 is the break-even if you exclude the ability to invest the benefits rather than consuming them. Investing the benefits pushes the break-even point out much further but, of course, is contingent upon returns.

        I will ABSOLUTELY, no questions asked, take my benefits early for the simple reason that I don’t need them. Since my lower benefits earned for a longer period will be invested for more years than your higher benefits earned for a shorter period, we will probably come out at the EXACT SAME PLACE…(we both win!!!). But in the off chance that I die earlier than expected, I won’t miss out on collecting any benefits (a small, but real risk…but not a “bet against yourself”).

        Sorry to quibble, but I just wanted to add an additional thought to the mix.

        Greatly appreciate your work,
        Dan

  • Seth

    The problem I see is with the bend points changing with inflation. This probably would not affect someone close to receiving SS benefits, but certainly it would affect the retire early crowd.

    As an example, I will hit the FRA in 29 years. At that time (using the CPI Inflation calculator in reverse), the first bend point would be 1872 and the second bend point would be 3785. This translates out into total SS contributions of 786,240 to hit the first bend point and 4,740,540 to hit the second bend point. Unless the yearly SS contributions change significantly, it seems unlikely to hit the second bend point.

    Or is my math and assumptions incorrect?

    • I’m not sure I follow the math, Seth, but I’m guessing you went south somewhere.

      The bend points will continue to grow, but so will the value of your past contributions as the index factor for prior years increases. They should grow at the same rate. Here’s a list of the bend points by year going back to 1979.

      Best,
      -PoF

  • JustADoc

    I’ve run calculators and run calculators on this.
    Unless you are rather sure you are going to earn 0% on your investments for a time frame of over a decade, you are financially best off to take the money at 62.
    You do not get nominally more money until age 82 if you wait until 70, and that assumes the money earned 0%.
    If it earns even 3-4%, that stretches your age up to late 80s, even 90s before you have more money from social security.
    I don’t know about you, but my travel(and almost surely overall) expenses will be much lower at 85 than 65

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