Early Retirement Impact on Social Security Benefits

 A reader asked me if retiring early would reduce my social security benefits, since I would not be contributing for many years before starting Social Security payments.   I had done the research before I retired (over five years ago), and determined there would be a minor reduction.  However, before answering the question again, I decided to do some followup research.

First,  the topic was also discussed on the EarlyRetirement.org forum.  The posters concluded there were two factors that impacted whether early retirement reduced Social Security benefits:

1. Years of contribution.   Social Security uses the top 35 years of employment contributions to calculate benefits, no matter how many years are worked.  If working less than 35 years, contributions are counted as zero until year 35 is reached.  In addition estimated benefits are calculated by extrapolating the most recent year until retirement age.
2. Years at maximum contribution.   Each year a maximum level is set for Social Security contributions.  The closer contributions are to the maximum level the closer the benefit is the maximum level.

Social Security also has a benefits calculator  that allows estimating of benefits when taking early retirement. It allows the entry of zero for future year, versus the typical estimator that assumes the last annual income until full retirement. Unfortunately,  it is a little cumbersome to use since it requires manual entry for each year worked.  I used this calculator to estimate the impact of early retirement on my benefits prior to retiring.

Although Social Security doesn't explicitly share, it appears the relationship between the two factors and benefit payout is asymptotic   After a certain number of years and years at maximum, the benefits don't increase much for each additional year.   Similarly, not working the last few years doesn't reduce benefits much.

In my case, I had 31 years (including 4 years of only summer jobs during college) of contributions to Social Security and  half were at the maximum contribution level.  Not working, i.e. making zero contributions for 4 years to get to 35 years, seemed to reduce my benefits around 5% (based on my recollection), versus contributing at the maximum level for another 16 years.   The reduction seemed like a reasonable trade off for retiring early.

Since retiring, I have made contributions for four more years.  There has been a 15% increase in full retirement benefits, because Social Security expects that I will contribute at the same level as 2011 for another 12 years, which I won't be doing.

Based on this analysis, I estimate a maximum reduction of 15% in my Social Security benefits from retiring early versus working until full retirement age.   However, I expect my reduction to be lower since I will be receiving several more years of deferred compensation from which Social Security taxes will be withheld.

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This is not financial advice. Please consult a professional advisor.

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