The Social Security Bonus

My total compensation package at work includes salary, bonus, and LTI (stock options).

I can pretty much count on my salary as long as I'm employed there, but my bonus and LTI are somewhat at risk. They never pay out what they're supposed to on paper.

As such, I tend to treat them like icing on the cake, and I don't bake them into my financial projections until they're confirmed.

Many of us in the FIRE community see Social Security in the same light. It would be nice if it were there at traditional retirement age, but we're not necessarily counting on it in our projections.

That doesn't mean we should ignore it completely. It's good to have a general idea of what Social Security could potentially generate as additional income.

Social Security Facts

According to the Social Security Administration, the average retired worker will receive $1,360/Month in social security benefits.

In 2017, over 62 million Americans were expected to be on Social Security.

social security fact sheet

The above benefit represents 34% of the income of elderly beneficiaries. 90% of individuals above the age of 65 receive some Social Security benefit.

Since Social Security pays out to dependents and survivors, it's also a form of life insurance. Also, most people are covered for disability.

The total average benefit per year is $16,320. This will vary based on past earnings, as can be seen by the chart below.

social security benefits

The lower the earnings, the higher the benefits relative to one's income. A lower wage earner could replace about 50% of their past earnings with social security income. At the maximum range, it's capped at about 30% of the current earnings limit of $127,200. Note the limit was $118,500 in 2016.

There are several other interesting facts on Social Security which I won't cover here, but if you're interested check out the CBPP site.

The Social Security Administration has created a website which allows users to create a personal account to access their benefits details. It's a free and handy tool that I used for my analysis below. If you haven't done so yet, I will encourage you to create an account.

Keep in mind that you must have worked at least ten years (in total) to qualify for benefits, so the calculations won't be as accurate if you're still early in your career.

Mr. Max Social Security Benefits

Assuming I continue to earn more than the maximum earnings limit between now and retirement age, here's what I should be expecting from Social Security:

At Full Retirement Age (67):   $2,908/Month // $34,896/Year

At Age 70:   $3,606/Month // $43,272/Year

At Early Retirement Age (62):   $2,040/Month // $24,480/Year

I had to smile at the early retirement definition of 62…no thanks!

What I need is an estimate on my definition of early retirement, but we'll get to that later.

The reason I highlighted the amount at age 70 is that I don't intend on tapping Social Security until I get the maximum benefit. I have that luxury since I'm building multiple streams for retirement.

Another reassuring part of Social Security benefits is that they payout to family members in case of death. This acts as a sort of insurance policy. Both little Max and Mrs. Max would qualify for $2,187/Month each should anything happen to me (75% of my benefit amount).

That amount would be about 30% higher if Mrs. Max deferred it to full retirement age.

This assumes Mrs. Max is taking care of little Max who must be younger than 16 years. It's also capped at $5,104 per family. There are many other conditions associated with survivor benefits, which you can read here if interested.

Mrs. Max Social Security Benefits

Assuming Mrs. Max also continues to earn at her current wage level between now and retirement age, here's what she should be expecting from Social Security:

At Full Retirement Age (67):   $2,645/Month // $31,740/Year

At Age 70:   $3,324/Month // $39,888/Year

At Early Retirement Age (62):   $1,806/Month // $21,672/Year

She also qualifies for survivor benefits, which would payout at $1,779/Month per family member.

Since I'm the only one who carries life insurance through my employer, it's good to know that there's a bit of a safety net in case something horrible happens.

Total Max Household Social Security Benefits

Here's what our combined household Social Security benefits would look like, based on the prior assumptions:

At Full Retirement Age (67):   $5,553/Month // $66,636/Year

At Age 70:   $6,930/Month // $83,160/Year

At Early Retirement Age (62):   $3,846/Month // $46,152/Year

This, of course, assumes no adverse changes to Social Security benefits between now and then, which I recognize could be a wild assumption.

To put these amounts in perspective, if we received $83,160/Year in income, that would be the equivalent of a $2,079,000 nest egg paying at 4%. That's one hell of a bonus!!

The income above is more than enough to cover our luxurious, Platinum Lifestyle Expense Package.

Let's imagine for a moment that both Mrs. Max and I didn't save a penny for our retirement. Instead, we spent all our extra money and were willing to work until traditional retirement age.

Taking this analysis into consideration, one would have to ask why to bother saving anything at all ?!

As long as we keep our expenses under control, and the cost of living increases to the benefits are reasonable between now and retirement age, we should be set!

Even at an “early” retirement age of 62, the benefits are still enough to cover our base expenses.

Unfortunately, the fate of the Social Security program is not set in stone. Although I'm sure there will be some benefit at traditional retirement age, I doubt it will be as lucrative as summarized above.

There's also the small issue of early retirement, as the FIRE community defines it. What impact could future earnings (or lack thereof) have on the benefits? It's the same question I posed in a comment on Financial Samurai. With a little digging and some help from Joe at Retireby40, this is what I came up with…

Social Security Benefits and Early Retirement

The Social Security Administration website has a page that contains a calculator which comes in handy for our scenario. It allows you to calculate your expected benefit by specifying when you intend to stop working.

You'll need your entire income history, which you can get by creating the account mentioned earlier, along with assumptions on future earnings.

The calculator will estimate your benefits based on a retirement Age of 62. Here are our results based on different years, and assuming max earnings in future years (Mr. Max / Mrs. Max / Total):

  • Stop work at 40:   $1,473 | $962 | $2,435/Month
  • Stop work at 45:   $1,681 | $,1230 | $2,911/Month
  • Stop work at 50:   $1,841 | $1,498 | $3,339/Month
  • Stop work at 55:   $1,985 | $1,656 | $3,641/Month
  • Stop work at 62:   $2,040 | $1,806 | $3,846/Month

Keep in mind that the values above would be much higher (as much as 75% higher) if benefits are delayed until the Age of 70.

There's a clear penalty for retiring FIRE early. It would cost us about $1,411/Month or 40% less in Social Security benefits if we stopped working at 40 and didn't earn a penny after. This is not our goal anyway so that analysis isn't relevant enough…

Cost-Benefit Analysis

To figure out how much Social Security money we're “leaving on the table,” we have to consider our aspiration.

We would like to have the ability to retire within the next five years. This would mean stopping contributions to the Social Security pool after age 45. We would still not collect benefits until age 70, so our estimated benefits at that time should be approximately $5,000/Month or $60,000/Year.

This is in comparison to the $83,160/Year we would be eligible for if we continued working until age 62, and delayed benefits until age 70.

Working those extra 20+ years would generate over $20,000/Year in benefits at retirement. If this was our sole income in retirement, we might be tempted to slave away longer. Fortunately, we can easily bridge the gap based just on our 401K savings.

Sure the equivalent Social Security nest egg would be $1.5M instead of the $2M (at 4%), but that's still a considerable annuity.

It's also improbable that we would stop generating income past the age of 45, so this is effectively a worst-case scenario on benefits. Still, it would be nice to see some benefit as a result of paying taxes all these years.

Final Thoughts

Although we're not counting on Social Security benefits for our retirement, I found this exercise worthwhile. When you have reasonable household expenses, the potential income from Social Security is not insignificant.

I don't intend on adjusting our financial goals as a result of this analysis, but I will be less concerned with the financial picture past the age of 70. Between our 401K savings, and some Social Security benefit (despite a potential reduction), we should have no problem covering expenses past that age.

This frees me up to focus on the next 30 years instead. If I can generate enough passive income from investments and alternative opportunities, I should be able to claim true financial independence.


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