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Social Security Reduction for Early Retirement

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By Glock21Jock
July 14, 2004

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I posted a question on June 25 titled "Where do I allocate my money?" I received some very good advice, but also a question I hadn't considered. The question was "Have you considered the reduction of your social security benefit if you retire early?" You advised me to go to my local office for help.

I went to my local SSA office. The clerks there kept telling me to get an estimate about three months before I retired if I wanted to know how much I'd get. One of them finally gave me worksheet, which allowed me to calculate my own benefits.

Our benefits are calculated on our highest 35 years of earnings, up to the maximum SS taxed amount. Each year has an 'Index" figure associated with it. For example, in 1951 the maximum SS earnings were $3,600. The Index Factor for 1951 is 11.76. Take your earnings for 1951 and multiply them by 11.76. The result is your indexed earnings. Do this for every year in which you earn wages. If your indexed earnings are more than the maximum SS earnings for that year, use the maximum SS earnings. In 1951 that was the $3,600 amount. In 2000, it was $76,200. By the way, the index as 1.02 in 2000.

Now, add up your highest 35 years of indexed earnings. Now divide this number by 420 to get the average monthly indexed earnings. (420 months in 35 years). In my case, this figure was $5,652. Now, here is where it gets interesting!

To calculate your benefit amount that you'll receive at age 65:
1. Multiply the first $606 by 90%. The result is $545.
2. If your indexed monthly earnings are over $606, subtract $606 from your earnings, up to $3,653. Multiply the result by 32%. In my case, $3653 minus $606 equals $3047, times 32% equals $975.
3. If you've averaged more than $3653, subtract $3653 from your average indexed monthly earnings. Multiply the difference by 15%. In my case, the monthly average was $5652, so the difference was $1999, so 15% is $300.

Wrapping this up, you can see that if one's average monthly earnings are more than $3,653, the amount over $3,653 is multiplied by 15%. That's the only benefit of working longer, so that delta is increased by 15%. I set up a spreadsheet to project my benefits, and saw that working till age 62 versus age 58.5 increases my SS benefit by less than $75.

I tried to copy and paste from my Excel spreadsheet onto here, so that it would be more clear. However, it doesn't appear that the columns are going to line up. I hope my explanation will be clear enough so you can figure how your benefits are calculated.

Thanks for the question,

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