Category Archives: Social Security

How Does Early Retirement Zero Earnings Impact Social Security Estimates?

Funding Retirement, Retirement Plan, Social Security,

Here’s How Mine Went

One of the knocks on early retirement is how it can negatively impact one’s future Social Security benefit. My recent Social Security estimate with zero earnings going forward is somewhat surprising. We pull our Social Security estimate to get an idea of what it will be. We then can use that information in our retirement plan and plug it into our favorite retirement calculator. It’s quite obvious when looking at our SSA estimate that claiming our benefit early at age 62 will result in a lifetime of lower monthly payments.

Choosing early retirement means we have decisions to make about when to claim our future benefit at age 62 or later. But how accurate is our Social Security estimate? The problem is that it uses something that’s a little less clear. It has a line that says: Your estimated taxable earnings per year after 2019……………..$XX,XXX. It uses our prior year’s earnings in the benefit calculation going forward to the reported filing ages to come up with the estimated age based payment results.

That earnings part of the Social Security calculation will be lower than the optimistic forward earnings estimate they used when it drops to a lesser number or to NONE once we retire early. Based on that sometimes overlooked line, one would expect that our received benefit may be lower than what we are looking at and used in our pre-retirement planning. But how much lower?

How Does Early Retirement Zero Earnings Impact Social Security Estimates?

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My Social Security Estimate With Zero Earnings

There are a lot of moving parts to how our Social Security benefit is determined. It’s presented to us in today’s dollars so we can make a mental association. We get a monthly benefit figure for age 62, our Full Retirement Age (FRA), and age 70. Before I reveal my numbers it’s important to understand the basics of how our Social Security is calculated. At a high level it has 4 components that go into it.

1- Social Security Payment Years

To qualify for Social Security benefits we must have had at least 10 years of paying into it through accumulated work time with a significant amount of earnings. The benefit is calculated based on the highest 35 years of earnings. If we have less than 35 years of paying into Social Security then $0 is used for the deficit number of missing work years and averaged for our benefit calculation. But it is more complicated than just that.

2- Surprise! Social Security is means tested through PIA

Primary Insurance Amount, aka PIA, is a weighted formula that gives higher Social Security benefits relative to overall career earnings for lower earners than for higher earners. The PIA formula uses what’s called your average indexed monthly earnings (AIME) in the calculation.

3- Our ancient salaries of decades past are normalized for inflation with AIME

The Average Indexed Monthly Earnings, aka AIME, is an inflation adjustment that uses wages instead of consumer prices. It reflects the U.S. economy’s average wage to normalize our years of earnings. It‘s done by indexing that puts our earnings in a comparative basis within the earnings level of the US by using the average wage indexing series. I have yet to find all the parameters used to get the actual index factor Social Security applies in our estimate against long past earnings years. Not surprising since it would change yearly as our estimate is always updated to be presented in today’s dollars.

4- Bouncing our AIME against PIA

The PIA is calculated using our highest 35 years of wage-indexed earnings and if we have less than 35 years then those missing years will be marked as $0 to make up 35 years. It is then averaged out and expressed as a monthly amount. That average amount is our AIME. Our AIME is then bounced against the PIA. Within our AIME amount the PIA applies a graduated percent of benefit. It goes from the lowest earnings bracket up to higher earning brackets. There are bend points within the PIA formula which represent earnings segments. The PIA formula gives 90% of our AIME for the first segment. Segment one is currently the first $826 of our monthly AIME. The next earnings segment between $826 and $4,980 is at 32% of AIME. High earners with AIME amounts above $4,980 get 15% of their AIME in the last segment.

For example, If our AIME is $5835. Then segment 1 is $826, Segment 2 is $4980, and Segment 3 is $29 ($826+$4980+$29=$5835). Our PIA bend point/earnings segment 1= $826 X 90% = $743. Bend point/earnings segment 2=$4980 X 32% = $1594. Bend point/earnings segment 3=$29 X 15% = $4. Total PIA benefit is then $743 + $1594 + $4 = $2341 per month.

Should Future Earnings of NONE Impact Our Social Security Estimate?

It’s easy to believe that having zero earnings going forward will impact our Social Security estimate. We are most likely earning far more later in our careers than we did some 35 years ago even after indexing. A pre-retirement estimate doesn’t consider retirement before collecting benefits. Basically the projection is optimistic before we retire by calculating that we will continue earning the higher later life earnings rate until our Social Security filing date. All those projected higher earnings years then override older lower earnings years. It actually says: *Retirement    You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until…

When I looked back 35 years from my early retirement year to 1975, my part-time earnings was $1002 that year. If I had $0 earnings going forward then that 1975 earnings would be counted as part of my 35 years for my AIME, not the last year’s reported earnings projection. Even when indexed that 1975 earnings amount should drag the Social Security estimate down once Social Security is calculated going to $0 income projected forward. I did accept that my actual Social Security benefit would be lower than what I looked at and used in my retirement planning before pulling the early retirement trigger. I just didn’t know how much.

High Income Earners

None of this may matter to anyone having 35 years of earnings above the Social Security earnings cap. The cap for maximum taxable earnings for recent years are –

  • 2019 $132,900
  • 2018  $128,400
  • 2017 $127,200
  • 2016 & 2015 $118,500
  • 2014 $117,000
  • 2013 $113,700
  • 2012 $110,100

If you have 35 years of high earnings that surpasses the Social Security earnings cap, then you qualify for the maximum Social Security payment amount. For 2019 that is $2,861 a month at full retirement age.

How My Social Security Estimate with Zero Earnings Going Forward Turned Out

My Social Security estimate at age 51 when I retired early with 35 years employment earnings.

My estimate includes 2 years working part-time when I was in high school within my 35 year earnings history. But those and other lower earning years of my youth wouldn’t matter. There is a high projected forward earnings based on the last year of my career in the calculation for another 11 to 19 years (depending on benefit filing age) into the future used to get the displayed benefit payment amounts.

*Retirement    You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until…

your full retirement age (66 and 8 months), your payment would be about- $ 2,417 a month

age 70, your payment would be about……………………………………. $ 3,113 a month

age 62, your payment would be about……………………………………. $ 1,687 a month

Your estimated taxable earnings per year after 2010……….  $106,800

As of now I have a total of 42 years of social security recorded earnings because of some sweet retirement gigs. I did things I wanted to do and learn to do for only as long as I wanted to do it. The 7 years of retirement gig’s yearly earnings ranged from a low of $668 to the high of $107K. My best guess is that 4, maybe 5 of my retirement gig year’s earnings ended up higher than earlier indexed earnings years. That obviously should improve my Social Security calculated amount once $0 earnings (NONE) is used in the calculation going forward and my benefit is calculated solely on my highest 35 years earnings history.

Here is a comparative view of some of my early retirement Social Security estimates. It includes the projected earnings listed as part of the estimate calculation.
You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until… your full retirement age (66 and 8 months), your payment would be about age 70, your payment would be about age 62, your payment would be about
Your estimated taxable earnings per year after 2010…..$106,800 $2,417 a month $ 3,113 a month $ 1,687 a month
Your estimated taxable earnings per year after 2015……$66,918 $ 2,423 a month $ 3,069 a month $ 1,746 a month
Your estimated taxable earnings per year after 2016……$40,438 $ 2,474 a month $ 3,134 a month $ 1,783 a month
Your estimated taxable earnings per year after 2018……$668 $ 2,589 a month $ 3,279 a month $ 1,866 a month
Your estimated taxable earnings per year after 2019……NONE $ 2,678 a month $ 3,392 a month $ 1,930 a month
I found it interesting when comparing Social Security estimates and reviewing my lifetime of earnings

Of my total 42 years of working and paying into Social Security I had 11 years that paid out high bonuses which allowed me to hit the Social Security earnings cap. I do remember having a few Decembers in my first career when I got a take home pay bump because Social Security wasn’t withheld from my check until the new year. Also included are 13 earlier years where I worked 2 jobs so my wife could care for our kids. Childcare was too expensive even in the 80s so we did what we needed to do. Working 12 hour days boosted my income those years so we could make ends meet and later pay off debt. That helped increase my AIME during those years although it added zero earnings years for my wife’s Social Security AIME calculations.

When I retired early I used the FRA amount of my Social Security estimate in my retirement calculations.

Since I wasn’t retiring with a million in the bank I needed to make sure I could fund my early retirement the way I wanted to. I believed that my Social Security may end up a couple of hundred dollars less once it’s recalculated with $0 earnings going forward. I was OK with that and started my new retire early and often life. But between inflation adjustments and the way Social Security PIA bend points favor lower earning segments, I now find that my FRA benefit amount is a couple of hundred dollars higher. Understanding of course it isn’t apples vs apples. One estimate is presented in 2010 dollars and the latest in 2019 dollars.

Inflation aside, one might think it should be higher since I worked some awesome retirement gigs that replaced some low earning years of my youth. However, that Social Security estimate I pulled way-back-when before I retired projected high forward earnings right up to my benefit filing date, not NONE as it is now. Those old future optimistic earnings figures Social Security used would also override old lesser earning years in the estimate. It would override much more of them than my few years of retirement gigs and a future earnings of NONE going forward to my benefit filing date. Those retirement gigs probably do help with the new estimate but doesn’t fully explain the numbers now being provided.  

What can I say about the impact to my Social Security estimate with zero earnings projected forward —

Hard to completely figure it out without having the full wage indexing factors they used against the small earnings of years-past to calculate my AIME. I can say that the latest Social Security estimate with NONE earnings going forward is better than I was expecting. If we have 35 years of work earnings paid into Social Security before we retire early, that pre-retirement Social Security estimate we pull and run through the retirement calculator might be a lot closer to our benefit amount than we think it will be. Both because there will be no zero earnings years calculated in our AIME and there being a shorter amount of years to our benefit filing date used in the earnings forward calculation.

Anyone who pulls off early retirement in their 30s or 40s with less than 35 years paid into Social Security may find a different result. Especially since there will be a longer calculation to age 62 or older projected forward with their current earnings amount. A more accurate Social Security estimate may only happen after a year or two of lower earnings or NONE. When deciding to retire early, running your numbers with a reduced anticipated future Social Security payment amount should be considered.

I always believed a lower Social Security benefit was a good trade for early retirement and still do.

Social Security may or may not live up to the estimates they give us. I believe that since we are required to pay into it our entire working lives that it will meet its obligations, although possibly reduced. So much can happen with the markets and Social Security but we plan with the data we have. The future is unknown, so we should always add a little worst case scenario planning, just in case. 

Funding Early Retirement for the Long Haul

Funding Retirement, Retire Early, Social Security

My plan for Funding Early Retirement for the Long Haul is something of importance since I am living off of my portfolio now and it is very real to me. My early retirement is funded primarily by my SEPP 72t IRA. I started it with my first retirement at age 51. It deposits the same amount every month into my savings account until I reach age 59 ½. You can see more details on my site pages, How I Fund my Retirement and Using your 401K or IRA to fund early retirement without penalty. It funds two-thirds of my budget. The other third is funded by non-retirement accounts.

I somewhat follow the 4% withdrawal rate guideline. It is a systematic monthly withdrawal approach. This strategy provides income starting out at 4% of the my portfolio value for the first year. Then each year afterward my withdrawal amount is adjusted up to match inflation. This approach has been considered a safe withdrawal rate to sustain a retirement over 20 to 30 years. A longer retirement, who knows?

Key words here is it is considered safe but there are no guarantees in investing. Or with these kinds of withdrawal rate guidelines. Does that worry me? Heavens no. Because I think I have a solid plan. As I always say this is an adventure. What is the worst that can happen anyway? Ok a lot of “worst” can happen but life is risky. Just get on with living it. I have a diversified portfolio and have done what can be done to mitigate investment risks.

I’m not planning on just setting the initial 4% withdrawal rate with yearly cost of inflation increases. I am not letting it go without reassessment. Obviously that 4% + inflation is a guideline. If it was a horrible year for the markets and my investments I will try to make sure I am not withdrawing a portfolio killing percentage. That means I must have a cushion of cash and safe investments. The cash is primarily in CDs and a Money Market fund which I know sucks for interest now but that is the cost of my peace-of-mind insurance. My safe money covers one to two years of income. That way I wouldn’t have to tap my investments in a down market.

Funding Early Retirement for the Long Haul Through My Retirement Stages.

I see my retirement as being in 3 stages. The Early Retirement, Standard Retirement and Last Stage of retirement.

Stage #1- Early Retirement

Early Retirement is fully funded by my portfolio until my standard retirement stage which is when Medicare and Social Security is started. The SEPP 72t is only required until I turn 59 ½ but the same payment arrangement can continue. I will be continuing with the 4% guideline but if I need to I will go up to 5% during this period. That is because this is the most active stage or time of our retirement. That and I totally expect some amount of Social Security to eventually help with my retirement funding.

That said I won’t be recklessly withdrawing from the funds. I just recognize that I can go a little higher if I need to as long as the portfolio isn’t substantially reduced because of market conditions. At this time I am planning on starting Social Security at my full Social Security age of 67.7 years old which is what I call the standard stage of retirement. I see this a big aid and a reduction on total reliance of my portfolio to fund my retirement.

Stage #2-  Standard Retirement

Standard Retirement starts with my Social Security. Based on my Social Security estimate,  I see it covering 30% to 40%, maybe more of my budget in today’s dollars. That’s even when reducing it for years of early retirement. I know a lot can happen with Social Security. It is always a subject of political debate. But I really believe it will be there for all of us and we all should demand it is with our votes. It can and should be made whole with reasonable tweaks. Rather than staying with my original 4% withdrawal amount, this is when I will recalculate based on the current portfolio balance and what is needed based on the added Social Security.

Stage #3- Last Stage of Retirement

Last Stage of Retirement is when I turn 70 ½ and the RMD (Required Minimum Distribution) begins. Now money is being dictated withdrawn from IRA accounts. For this entire retirement my plan is to fund it from IRA and non-retirement accounts with eventual Social Security. My ROTH IRAs are for this last stage/time or later. I don’t plan on tapping them unless in any year we can see a tax advantage to mixing withdrawals from IRA and ROTH. Until we get there I am not that dialed-in on that part of the plan but aware I may have to consider it.

Other things that I know will come up is our home. It is paid off and I can see us selling it at some time. We may downsize to a smaller place and bank any of the savings. Another possibility is just renting an apartment in a Senior Citizens complex and banking all sales proceeds. All will be decided later when the picture is more clear.

In Conclusion

I think many people become paralyzed in fear of burning through their money. Maybe because I live a retire early and often lifestyle where more money comes in time to time I have a distorted feeling of comfort in my plan and the way I look at all of this. I do think the 4% guideline is a good plan to start with. Realizing that there may have to be adjustments to the withdrawal rate is also necessary for successfully Funding Early Retirement for the Long Haul.

What is your long haul retirement funding plan?

Do you see where I may be walking a tight rope without a net?

One Percents War on Generation Millennial

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The One Percents War on Generation Millennial has been a full success. They have so far won. For many of the millennial generation their eventual retirement is going down the toilet or at very least will be a lot harder to fund long-term. All to the cheers and high-fiving of America’s One Percent. They used their manufactured generation war to do it. Before you leave this page thinking Leisure Freak Tommy is a crazy crack-head please hear me out.

The generational warfare of “Blame the Boomers” is a calculated agenda. One deliberately designed by the One Percent as a distraction. Its purpose, so nobody would focus on the class war that they have successfully waged for many years. I should say decades. Instead of having public debate on any policies redistributing obscene amounts of income upward, the One Percent wanted to turn this into the millennial generation against their parents and grandparents issue. Forcing everyone to fight over the peanuts that the One Percent has decided should be our fate. This is all about them maintaining current policy, status, and power.

The One Percents War on Generation Millennial?

What in the hell is Leisure Freak Tommy ranting and raving about?

One Percents War on Generation Millennial - Social SecurityIt is all about the Millennial Generation’s SOCIAL SECURITY. Here is why I call it the One Percents War on Generation Millennial.

No legislation gets passed in our government unless special interest big money is behind it. That is just the way it works. The only thing that keeps things in check so the One Percent and special interest doesn’t just get everything they are buying with their lobbying is our government’s fear of the voter. Voter backlash is the only weapon. The one thing that the common citizen of the USA has to keep things in check.

There is no going against the One Percent’s big money to change anything and they know it. What the One Percent needs to do is remove the fear of the voter to get the government to do their bidding. That is what they did to the millennial generation. Here is what the did-

While establishing the generational war to distract everyone, the millennial generation has been convinced that they won’t get Social Security. At least the majority of them believe so based on a recent Pew Research study.

When I saw these Pew Research Study results I was driven to write this article.
  • Only 6% said they expect to get full Social Security benefits when their time to retire comes.
  • Over half, 51% believe there will be no money for any benefit for them.
  • Only 39% believe there will only be a reduced benefit for them.

The more millennials in numbers that accept or believe they won’t get Social Security the less chance of any threat of a millennial generation voter backlash. Instead of showing their anger with their votes they shift their anger and blame at their parents and grandparents. Bingo! It’s now OK to kill the millennial generation’s and future generation’s Social Security retirement benefit. Why not?  It will be easy because they aren’t expecting it anyway.

What does this have to do with the One Percent?

For many years ordinary workers have gained little benefit from economic growth. Most of the gains go to those long-time rich families of this country’s elite. Then all of  the high-ranking executives of Corporate America such as the CEOs and any executive title that starts with the letter “C” that they seem to make up as they go. There is also Wall Street and the high ranking professionals like some of the lawyers who not only serve the One Percent elite but are part of them.

The One Percent love the upward redistribution of wealth. They pay big money to have the national debate focus on $1200 monthly Social Security checks instead of the policies that made them super wealthy.

Their goal is to keep everyone’s focus away from the policies that make them rich.

They do so at the expense of the 99% and they are ready to spend big money to keep the distraction going. One Percents War on Generation Millennial -Federal Spending as share of GDP_LFClaims being made that Social Security will ruin the finances of the country and enslave young people with debt are over exaggerations or outright lies.

Good jobs that could be going to younger people in the millennial generation are instead outsourced or in-sourced. My last company where I worked (2014) was in the  top 50 of the fortune 500 Companies. Employees were systematically laid off and replaced by people from India. Who makes these decisions? The One Percent executives do.

This issue and many others that are the cause of the lack of upward mobility for the younger generation isn’t being discussed. All because of the calculated distraction to look at other generations to blame for their audacity to grow old and start taking their Social Security. How much traction do stories about the growing and obscene wage gap between the rich and poor get? Not much.

There is a big demographic change- IOUs are coming due

Boomers who have paid into the Federal Government’s mandatory retirement annuity, Social Security, for 40 years or more are now retiring and starting to collect. The problem is the surplus from the money the gazillion boomers paid in is gone, It was spent in the general budget on wars and whatever else they needed to spend money on.

They replaced the collected Social Security money with an IOU which I have seen as called “special issues of the Treasury” which can’t be sold on the open market like a Treasury bond can. Its only purpose is for accounting. To track the amount of Social Security money spent for other than qualified retiree’s Social Security payments.

So the Government has to pay it back from the general fund or borrow more money. Pay back from the same general fund that income taxes go to. The fund that pays out for things like the Military, Highways, and every special interest issue you have heard of or can think of.

If they didn’t have enough in the general fund before and had to use Social Security to fund their wars and everything else, then guess what? The Federal Government might just have to cut back on all of their spending to pay back this Social Security money. Having to direct money to repay this debt will cut the money pouring out to other things. The things of which is the money that ultimately enriches the One Percent. The only other alternative is to raise taxes and we know how the One Percent feels about that.

The One Percents War on Generation Millennial - Favored Saving Social SecurityThere have been practical suggestions to fix things

Any practical Social Security funding solution goes nowhere. All because big money isn’t behind it. Even though “the people” have weighed in.

So here is their plan. Let’s cause a huge diversion. Do nothing incremental now that would be less painful to shore up Social Security. All because it might get in the One Percent’s pocket. Just call Social Security a failure and blame it on the very people who paid into it. That way the Government’s pay-back is eliminated and the money keeps flowing upward just like it has been. Brilliant!

Social Security serves a great purpose and must be saved.

Social Security ensures people won’t grow old and starve to death. It was never meant as the only thing to live on. But we all know there are scores of people who were either low-income and couldn’t save or financially irresponsible and wouldn’t save.

Calling Social Security an entitlement like it is some kind of welfare is part of the big lie. Any talk of means-testing it against people’s retirement savings also only rewards the financially irresponsible. Many who may have had higher incomes than the responsible who saved. That is a slap in the face to anyone who did the right thing to prepare for retirement. That kind of talk comes straight from special interest money.

Besides, Social Security is already means tested toward the poor. Simply raising the Social Security Income thresholds and applying existing means testing bend point equations with new variables would increase Social Security funding.

If you are a millennial and are ever asked about Social Security, say you expect it. Demand it and don’t call it an entitlement. Call it our country’s mandatory retirement annuity. Always Vote based on issues like this. Do not let the One Percent get away with shifting all the pain of the government’s spending on the 99%. The very spending from which the One Percent lobbied for and enriched themselves. The time is now to start taking steps to shore-up Social Security. Do it before it’s too late for future generations.

One last note.

Whenever Social Security reform is brought up they always say that there will be no or little impact for those 55 and older. Ask yourself why. Are they more worried about the financial impact or the boomer voter backlash?

If the One Percent wins and Social Security is eliminated for the Millennial Generation with nothing more than a yawn because millennials have bought the big lie. Do you think the One Percent are going to stand up and help pay? Pay for those millennials who were low-income and couldn’t save or the financially irresponsible and wouldn’t save for their eventual retirement? Without Social Security the One Percent will start another designed plan. Another one backed by big money for YOU to pay for the financially unfortunate in another way.

The One Percents War on Generation Millennial can be reversed by millennials expecting and demanding that Social Security be there for when they retire. They can do so with their votes. With the threat of millennial voter backlash their war will be throttled.

In Closing

Look, I am not some far left-wing activist. I consider myself a moderate independent and vote the candidate and issues. I believe in Capitalism but the One Percent’s ever growing wealth must be honestly earned. Not taken by smoke-and-mirror financial sleight-of-hand and policies that allow legalized corruption.

They know that this is not sustainable. They have to realize that to have a strong top One Percent you need a strong base of the 99%. But they are willing to stretch it until it breaks before relenting. How many will suffer if that is allowed?

There is so much that needs to be done. What I am calling out is for millennials to not give up on your Social Security benefit. It is worth fighting for.

What do you think? Is your distrust and cynical attitude about our Government greater than your belief that the One Percent really doesn’t give a rat’s ass about you?

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