How does early retirement affect Social Security benefits?

I originally wrote this post in 2012 to find out How does early retirement affect 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 has decreased, but my happiness has increased dramatically. After 12 years of early retirement, I’m happy to report that I have no regrets.

My income has decreased over the past few years. It’s unfortunate, but it’s all part of the plan. I work less so I make less money. However, my estimated Social Security benefits have stabilized. You’ve worked enough years that more earnings won’t affect the benefits much.

Well, we’ll quickly review how Social Security benefits are calculated. Then we’ll review 3 scenarios to see how early retirement affects Social Security benefits.

Social Security Abstract

In the United States, Social Security is the federal Old-Age, Survivors, and Disability Insurance (OASDI) program. Social Security is funded by payroll taxes and is intended to be a safety net for all eligible workers. We’ll focus on the “aging” 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 credit hours 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 throughout their working lives.
2. the benefit (Basic insurance amount or Pia) is calculated from your average indexed monthly earnings (Amy.) That’s your take Highest 35 year old earning And its average to monthly income. Once you have an AIME, interest is calculated using the following formula*.

• A) 90% of the first $1,226 of his or her average indexed monthly income, plus
• b) 32 percent of its AIME over $1,226 to $7,391, plus
• C) 15 percent of his average indexed monthly income of more than $7,391.

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

Bending points

The chart below shows the Beneficiation Formula Bend Points. You can see that the higher your income, the more Social Security benefits you will receive in retirement. However, the benefits are diminishing.

Social Security will be more beneficial if you work less. If you have Amy About $1,226, then Pia (Social Security benefits) will replace 90% of your income. As AIME increases, the benefit covers a smaller percentage of your income. So, if your AIME is $10,000, you will 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 seems true to me. Low-income families need more help in retirement. Higher earners can save more in their retirement accounts and don’t need as much help.

I also added where Ms. RB40 and I are on this chart. We both have over 40 credit hours and are eligible for Social Security benefits. We will delve more into these two points next.

Early retirement affects Social Security benefits

Social Security is a bit uncertain for my generation because the program will start running out of money in 2035. If Congress doesn’t fix the program soon, we may get less than full benefits. Unfortunately, I think reforming Social Security will be very difficult. Congress can’t get anything done. It’s ridiculous. They will continue to kick the can down the road and we will all pay the price one day. It really shouldn’t be that hard to fix. If we raise the Social Security tax limit, the Social Security trust fund should last longer. Perhaps the retirement age needs to increase as well. People are living longer these days. However, we will join Congress by burying our heads in the sand and ignoring this looming problem for now.

*For 2025, you’ll pay Social Security tax on up to $176,100 of your earnings. I think we should raise this cap to $1,000,000.

If you pay close attention to the recap above, you’ll see that Retiring early will reduce your Social Security benefits. Retiring early means you’ll miss out on your peak earning years. This will reduce the AIME, which is the average of the top 35 earners. I left my engineering career when I was 38 and have yet to have 35 years of earnings. At the end of 2023, I will have 30 years of profits under my belt. This means that there are 5 years of Zero profits Pull my AIME down.

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

• Joe’s AIME = $7,386 (Previous earnings are adjusted for inflation through an indexation factor.)

Fortunately, I’ve made some income from blogging over the past 12 years. However, my income is slowly dwindling. Below is a chart of Social Security taxable earnings.

AIME for Ms RB40 is lower. She has 29 years of income, but she earned less when we were young. Today, she makes more money than I do, but it will take many years before her AIME program catches up with mine.

• AIME for Ms. RB40 = $5,536

Now let’s go through some scenarios and see how our benefits will pan out. I will use the online calculator at ssa.tools.

Scenario 1: Full retirement now = $3,074 per month at 67

If I stop working now and no longer have any earned income, my benefits will be $3,074 when I turn 67. This is the blue dot in the chart below.

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

• Ms. RB40 would receive $2,482 per month at age 67 if she stopped working now. This is a chart that assumes no future income. The RB40 is a little behind at the green dot.

Part-time self-employment for another 5 years: $3,093 per month

My online income has decreased, but I hope to earn $10,000 a year for another 5 years. Once the RB40Jr (our son) goes to college, I plan to stop working completely so we can travel and relax more. In this scenario, I input $10,000 per year from 2024 to 2029. Then I will have no income after that. Estimated future income replaces many $0 Earn years in an AIME account. It doesn’t make much of a difference because the prime monetization years are already in the past. The next few years will have little impact on my Social Security benefits.

My estimated benefits will rise to $3,093 per month. This is less than $20 per month more than the previous scenario. That’s a very small increase for another 5 years of work!

Another 5 years of work will have a huge impact on the Ms. RB40. Her estimated benefits rise to $2,978 per month. This is an increase of 30%. She is in her prime earning years now. The next few years will bring a significant increase in AIME and Social Security benefits.

Part-time self-employment for another 16 years: $3,095 per month

What if I continue working part-time until I’m 67? (16 more years). This will increase your estimated benefits by just $2 per month. Not worth it.

This increase is minimal because working longer will not change the AIME much. In the previous scenario, I already had 35 years of solid profits. I also earn very little these days. Unless I earn a lot more income, working longer won’t affect my Social Security benefits much.

• Working for another 16 years will have a greater impact on Ms RB40. Her benefits will increase to $3,448 per month. That’s a good bump.

Different scenario

This spreadsheet shows how early retirement affects Social Security benefits. If you retire before you’ve worked 35 years, it will hurt your benefits. Also, my peak earning years were in my 30s. Working more now won’t make much difference.

In contrast, the 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, Will it change my mind about early retirement?

Not at all, life is great in early retirement. Even if I stopped working today, I would still receive $3,074 in Social Security retirement benefits when I turn 67.

Ms RB40 should also receive benefits worth $2,482 at age 67 if she stops working now. This means an additional $5,557 per month for our family. It should cover our basic living expenses. If we keep lifestyle inflation low, we should be in good shape. Ms. RB40 isn’t quite ready to retire yet, so I will update this annually.

At the same time, we will continue to work on increasing our passive income. Once our passive income consistently exceeds our expenses, we’ll be set. Any Social Security benefits would be gravy. My father-in-law uses his Social Security benefits as a slush fund. I would like to do the same when we turn 67. It’s a great idea.

Have you reviewed your Social Security statement recently? Do you depend on it to fund your retirement?

If you made it to the end, check out this post – Do You Deserve More Than You Earned? You already have earnings statements, so you may also be able to find out if you’re worth more than you earned.

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

Photography by Mark Siglatt

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

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

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