In this article, I’m going to discuss what happens to your social security payment if you retire early. You would be lucky enough to have sufficient saving to think about getting early retirement, but a common question that comes up is if you retire 05, 10, or even 15 years you are eligible to collect social security and what happens to your payment?

**How does Social Security Administration (SSA) determines the size of your Payment?**

It is pertinent to mention here that the Social Security Administration (SSA) U.S. determines the size of your payment by how long you worked and how much you earned. We assume that you waited until full retirement age and when you look at your paycheck, there’s a line item called Federal Insurance Contributions Act (FICA.) which is your social security tax. FICA works a little bit like a savings account.

**What if you work less?**

So, if you work for only a few years, then you have only contributed to social security for a few years and therefore, the amount available to you is a lot less than if you have worked your entire adult life. And this point is really important because you might be thinking of getting early retirement and working less than someone who worked right up to age 62 or later to collect social security. FICA looks like a savings account in another way. Because it is based on how much you earn, the more you earn, the more social security tax is taken out, and the more you receive on the other end when you draw on your social security.

That’s why someone who earned $60,000 a year on average gets more than someone who earned $30,000 a year on average, assuming that they worked the same number of years. On the flip side, for those of you who are not interested in maximizing your payment, and let’s be honest, who is not interested in that, you at least need to understand the ticket to the game, and that is social security credits. One social security credit represents three months of work that you earn, $1,470 or more, and you need 40 social security credits to even qualify for a social security payment. By the way, $1,470 and a quarter is $5,880 in a year. That’s a pretty easy target to achieve. And that number would have even been lower in the past, making it easier still.

**You need at least 40 credits of earnings before making any decision**

So step number one is to make sure that you have 40 credits of earnings before you make any decisions. Now, the reason that you came here, over your lifetime, you will have earned varying degrees of income. The Social Security Administration (SSA) needs to know one thing about each of those income streams, and that is,

what is the value of that income stream in today’s dollars? For example, in 1986, if you earned about $10,000 to bring that to today’s dollars, you’d multiply it by about 2.3. So, $23,000 is the equivalent in today’s dollars. If it was 2006, the multiplier would be about 1.6%. So if you earned about $10,000 to bring that to today’s dollars, you’d multiply it by about 1.6%. And if you earned about $10,000 to bring that to today’s dollars, you’d multiply it by about 1.6%.

It is added here that the SSA takes your best 35 years and discards the rest. And then they add that all together, and they divide that number by 35. And then they divide that number by 12, and that’s what’s called your average monthly earnings. It’s this last point that becomes particularly problematic for someone who doesn’t work 35 years. Because if you don’t have 35 years of earnings, they add zeros to get you to 35 years.

But the good news is that there’s a mitigant to help you called bend points, which makes the impact of zero earnings years less of an impact. For example, in 2024, the SSA will pay you 90% of the first $996 of your average monthly earnings. That’s $896 on your social security payment. For the next 5,000 and a half years, you will have to pay $9,000 of your average monthly earnings. That’s $996 on your average monthly earnings. That’s $996 of your average monthly earnings. They pay you 32%. And anything beyond that, they pay you 15%. Bend points can close the gap for someone who has worked all of their adult life compared to someone who’s only worked part of their adult life.

**Working for 30 years instead of 35** Years

Let’s assume that instead of working for 35 years, you decided you only need to work for 30 years. Let’s also assume, that your last year of work, you had been making $50,000 and your compensation had been growing at two and a half percent per year every year up until that point. A two and a half percent, by the way, is in today’s dollars. So, no need to think about inflation for the purposes of this article anyway. But if you left the workforce after 30 years, your average monthly earnings would be $2,534. However, if you had continued to work and earned another two and a half percent per year, you would have earned $2,534. So that’s $2,534. And if you had gone beyond the 30-year mark up to 35 years, your average monthly earnings would be $3,175.

So, your average monthly earnings at 30 years is 80% of what they would have been at 35 years. If you run 30 years, i.e. $2,534 through the bend points, you get $996 times 0.9, that’s $896, plus $1,538 times 0.32, that’s $496.But If you run 35 years, $3,175 through the bend points, you get 0.9 times $996, that’s $896, plus 32% of $2,179, that’s $697, for a total of $1,593.

So, if you work 30 years, you receive 87% of the full retirement age payment that you would receive if you worked 30 years. So that’s $2,179. This is because the average monthly earnings has less value as it goes through bend point number two and less value still if it goes through bend point number three.

Now, what if you did really well and after 30 years, you were earning $140,000 a year?

Your average monthly earnings, assuming the same 2.5% per year increase, would be $7,095. If you waited the full 35 years, your average monthly earnings would be $8,891. So, just like before, the average monthly earnings would be 80% after 30 years of what the average monthly earnings would be if you’d worked the full 35 years.

So, if you run 30 years, $7,095 through the bend points, you get 90% of $996, that’s $896, 32% of $5,006, that’s $1,602, and 15% of the balance. That’s 1093 times 15%, or $164.That gives you a total social security payment of $2,662, at full retirement age. If you run 35 years through the bend points, remember that’s an average monthly earnings of $8,891.You have $896 for bend point number one, $1,602 for bend point number two.

Those don’t change from before. And bend point number three, $2,889 times 15% is $433, giving you a total of $2,931. Your actual social security payment after 30 years, is 91% of what it would have been had you worked for 35 years, even though your average monthly earnings was 80%.

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