What happens to my Social Security benefit if I retire early?

.............

This article was posted March 1, 2007.

One question many people ask is "What effect does retiring early have on my monthly Social Security benefit?" Obviously, the less you work, the smaller your check will be. But even if you retire at age 40 or age 50 and don't pay any FICA taxes in the 15 or 25 years prior to your first check, you still get a significant monthly benefit.

Your Social Security benefit is based on the amount of your "covered wages". In 1937 when the Social Security began, only the first $3,000 in annual earnings was subject to FICA. The amount of covered earning as well as the FICA tax applied to those earnings has risen steadily over the years. (See table.) For 2007, the first $98,400 of earnings is subject to employment tax.

If you want to estimate your own Social Security benefit, the Social Security Administration provides a handy web-based calculator on their site. Click here.

Tale of Two Workers

To illustrate what happens to your Social Security benefit, let's look at two workers. Joe Smith, Attorney-at-law started working at a big firm after he graduated from law school at age 25 in 1961. He's earned more than the maximum Social Security wage for the past 40 years. He'll get a monthly benefit of $2,037 when he retires at age 66 in January 2007.

Mary Johnson worked as a department manager for retail store and earned just half of the maximum Social Security wage over the past 40 years. She'll get $1,433 per month if she retires at age 66 in January 2007. The table below compares Joe and Mary's monthly Social Security benefit at age 66 based on at what age they quit working.

Comparison of Monthly Social Security Benefit based on covered wages and the age beneficiary stops working
Stops work at age	Joe Smith High-wage earner (Monthly Benefit @ age 66)	Mary Johnson Mid-wage earner (Monthly Benefit @ age 66)
65	$2037	$1433
60	$1964	$1353
55	$1888	$1273
50	$1804	$1183
45	$1678	$1048
40	$1400	$890
Note (1): Joe Smith earned at least the maximum Social Security wage over the past 40 years (i.e., $94,200 for 2006.) Note (2): Mary Johnson earned just half the maximum Social Security wage over the past 40 years (i.e., $47,100 for 2006.) Note (3): The monthly benefits in the table above assume that the beneficiary waits until his or her full retirement age of 66 before collecting their first check. If you start taking Social Security benefits at age 62, the monthly benefit is reduced.

What to conclude from this analysis?

There may be many reasons to keep working past the point where you've reached financial independence, but a larger Social Security check probably shouldn't be one of them. For a high salary worker, paying FICA taxes for an additional 15 years from age 50 to age 65 only increases your monthly benefit by 13% from $1804 per month to $2037 per month. For a mid salary worker, the results are a bit better -- a 21% increase from $1183 per month to $1433.

Actually, the most startling result from this analysis is how little your Social Security benefit drops if you are absent from the workforce in the 15 years prior to collecting your benefit. If you are one of the declining number of workers with a defined benefit pension, ask your employer how much of a haircut you'd take by retiring at age 50 instead of age 65. I suspect it would be a lot more than the 13% drop in Joe Smith's Social Security benefit above.