How Early Retirement Impact Social Security Benefit

I originally wrote this post in 2012 to figure out how early retirement impacts 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 dropped, but my happiness increased tremendously. After 12 years of early retirement, I’m happy to report that I have zero regrets.

My income has been trending lower over the last few years. That’s unfortunate, but it’s all part of the plan. I work less so I make less money. However, my Social Security estimated benefits have stabilized. I worked enough years that more earnings won’t impact the benefits that much.

Okay, we’ll quickly review how the Social Security benefit is calculated. Then we’ll review 3 scenarios to see how early retirement impacts Social Security Benefits.

Social Security recap

In the United States, Social Security is the Old Age, Survivors, and Disability Insurance (OASDI) federal program. Social Security is funded through payroll taxes and is meant to be a safety net for all qualified workers. We’ll focus on the “Old-age” or retirement part of the program today. Not everyone qualifies for Social Security retirement benefits. These are important things to know about Social Security.

1. First, you need 40 credits to be eligible for Social Security. You can earn up to 4 credits each year. Almost all Americans earn enough income to earn these 40 credits over their working life.
2. The benefit (Primary Insurance Amount or PIA) is calculated from your average indexed monthly earnings (AIME.) This takes your highest 35 earning years and averages them out to a monthly earning. Once you have the AIME, then the benefit is calculated with the following formula*.

• A) 90 percent of the first $1,226 of his/her average indexed monthly earnings, plus
• B) 32 percent of his/her AIME over $1,226 to $7,391, plus
• C) 15 percent of his/her average indexed monthly earnings over $7,391.

*Updated for 2025. These numbers change annually to reflect inflation.

Bend Points

The graph below shows the “Benefit Formula Bend Points.” You can see the more you earn, the more Social Security Benefits you will receive in retirement. However, the benefits taper off.

Social Security will be more helpful if you make less. If your AIME is about $1,226, then the PIA (Social Security Benefits) would replace 90% of your income. As the AIME increases, the benefit covers a smaller percentage of your income. So if your AIME is $10,000, then you’d receive $3,468 or 34% of your average monthly income. For 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. Lower-income households need more help with retirement. High-income earners can save more in their retirement accounts and don’t need as much assistance.

I also added where Mrs. RB40 and I are on this graph. We both have over 40 credits and are qualified for Social Security Benefits. We’ll dig deeper into those 2 dots next.

Early Retirement Impacts Social Security Benefits

Social Security is a bit uncertain for my generation because the program will start to run out of money in 2035. If Congress doesn’t reform the program soon, we may receive less than full benefit. Unfortunately, I think Social Security reform will be extremely difficult. Congress can’t get anything done. It’s ridiculous. They’ll keep kicking the can down the road and we’ll all pay the price someday. It really shouldn’t be that difficult to fix. If we raise the Social Security tax limit, the Social Security trust fund should survive much longer. The retirement age probably needs to increase as well. People live a lot longer these days. Anyway, we’ll join Congress by sticking our heads in the sand and ignoring this looming problem for now.

*For 2025, you pay social security tax up to $176,100 of your earnings. I think we should raise this cap to $1,000,000. 

If you paid close attention to the recap above, you would see that early retirement will decrease your Social Security benefit. Retiring early means you will miss out on your peak earning years. This will reduce the AIME, the average of your 35 highest earning years. I quit my engineering career at 38 and I don’t have 35 years of earnings yet. At the end of 2023, I have 30 years of earnings under my belt. That means there are 5 years of ZERO earnings dragging my AIME down.

My current AIME is 30 years of earnings divided by 35.

• Joe’s AIME = $7,386 (Past earnings are adjusted for inflation via the indexing factor.)

Luckily, I made some income from blogging over the last 12 years. My income is slowly tapering down, though. Here is the chart of our Taxed Social Security Earnings.

Mrs. RB40’s AIME is lower. She has 29 years of earnings, but she made less income when we were young. Today, she makes way more money than I do, but it will take many more years before her AIME catches up to mine.

• Mrs. RB40’s AIME = $5,536

Now let’s go over a few scenarios and see how our benefits will turn out. I’ll 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 more earned income, my benefits would be $3,074 when I’m 67. This is the blue dot on the chart below.

I’m right at the second bend point. This is a great spot. I worked enough to get good benefits. When you go past the second bend point, the benefits don’t increase much.

• Mrs. RB40 will receive $2,482/month at 67 if she stops working now. Here is the chart assuming no more future income. Mrs. RB40 is a bit behind, at the green dot.

Part-time Self Employment for 5 more years: $3,093/month

My online income has been decreasing, but I hope to earn $10,000/year for 5 more years. Once RB40Jr (our son) goes off to college, I plan to stop working completely so we can travel and relax more. In this scenario, I input $10,000/year from 2024 to 2029. Then I won’t have any income after that. The estimated future income replaces many of the $0 earning years in the AIME calculation. It doesn’t make a big difference because my prime earning years were already in the past. The next few years will have minimal impact on my Social Security Benefits.

My estimated benefits would increase to $3,093/month. That’s less than $20/month increase from the previous scenario. That’s very little increase for 5 more years of work!

5 more years of work would make a huge impact for Mrs. RB40. Her estimated benefits increase to $2,978 per month. That’s a 30% increase. She is in her prime earning years now. The next few years will substantially increase her AIME and Social Security Benefits.

Part-time Self Employment for 16 more years: $3,095/month

What if I continue working part-time until I’m 67? (16 more years.) That will increase the estimated benefits by just $2/month. It isn’t worth it.

This increase is minimal because working longer won’t change the AIME much. In the previous scenario, I already had 35 solid earnings years. Also, I’m making very little these days. Unless I make a lot more income, working longer won’t impact my Social Security Benefits much.

• Working for 16 more years would make a bigger impact for Mrs. RB40. Her benefits would increase to $3,448 per month. That’s a good bump.

Different Scenario

This spreadsheet shows how early retirement impacts Social Security Benefits. If you retire before working for 35 years, it will hurt your benefits. Also, my peak earning years were in my 30s. Working more now won’t make a big difference.

In contrast, Mrs. RB40’s peak earning years are in her 50s. In her case, working longer would increase her Social Security Benefits significantly.

Now that I know all this, does it change my mind about early retirement?

Not at all, life is fantastic in early retirement. Even if I stop working today, I’d still receive $3,074 in Social Security retirement benefits when I turn 67. Not too shabby.

Mrs. RB40 should also receive $2,482 in benefits at 67 if she stops working now. That’s $5,557 per month extra for our household. It should cover our core living expenses. If we keep lifestyle inflation down, we should be good. Mrs. RB40 isn’t quite ready to retire yet so I’ll update this annually.

Meanwhile, we will keep working to increase our passive income. Once our passive income surpasses our expenses consistently, then we’ll be set. Any Social Security Benefits will be gravy. My father-in-law uses his Social Security Benefits as a donation fund. I’d love to do the same when we’re 67. That’s a great idea.

Have you checked your Social Security statement lately? Are you counting on it to fund your retirement?

If you made it to the end, go check out this post – Are you worth more than you earned? You already have the earning data so might as well figure out if you’re worth more than you earned.

*Sign up for a free account at Empower to help manage your investment accounts and net worth. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY investors. Take charge of your finances so you don’t have to depend on Social Security in your old age!

Photo by Marc Szeglat

Please follow and like us:

The following two tabs change content below.

Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.