Why Increasing Social Security Benefits Isn’t Worth The Effort For Early Retirees

Mrs. C. and I reached Lean Financial Independence in mid 2020 at ages 34 and 38.  Over the last 3 years we have increased our financial position substantially and are at full financial independence. I still work my primary contracting job, which is roughly 18 weeks per year on average. I recently was talking to my parents about their Social Security options and the idea came up that I should look more deeply into what I can do to better maximize my future benefits, after all, I have a large time horizon in which to optimize.

How Social Security Retirement Benefits are calculated:

To determine an individuals Social Security retirement benefit the SSA (Social Security Administration) takes the highest 35 years of earnings, indexes them to inflation, and then provides the AIME ( Average Indexed Monthly Earnings) by dividing by 420 months.

Note: Only earned income counts.  Rental income for instance, is not taxed for Social Security, and thus does not increase Social Security benefits.  Only W2 jobs and self employment income count.

The AIME is then used to compute the PIA (Primary Insurance Amount), which is the full retirement benefit the individual would receive if taking Social Security at the full retirement age of 67.

To determine the PIA the AIME is put through a series of bend points. These bend points change every year with inflation.  For 2024 the first bend point is $1,174.  The AIME up to $1,174 is multiplied by 90%.

The second bend point is $7,078.  AIME between $1,174 and $7,078 is multiplied by 32%.

Any remaining AIME over $7,078 is multiplied by just 15%.

Example:

Across the top 35 years of Steve’s career his indexed earnings totaled $3,500,000.

• This $3,500,000 is divided by 420 months to arrive at an AIME of $8,333.
• The first $1,174 is multiplied by 90% to get $1,056.
• The next $5,904 is multiplied by 32% to get $1,889.
• The final $1,255 is multiplied by 15% to get $188

These numbers are added together to get Steve’s full PIA benefit of $3,133.

Benefits are of course also affected by when someone chooses to take them.  Taking Social Security benefits early at age 62 reduces the PIA by 30%.  Waiting until 70 to take advantage of all delayed credits will increase the PIA by 24%.  Thus depending on when Steve takes his benefit he would receive a low of $2,193 up to a high of $3,885.

Spousal Benefits:  The spousal benefit system is set up where a spouse can choose to either take their benefit based on their own earnings record, OR take 50% of their spouses benefit.  Imagine if Steve’s wife was primarily a stay at home mother and had very little W2 earnings throughout her life.  Maybe she only worked for 5-10 years and would have a PIA of $200.   Taking her spousal benefit at full retirement age would give her a benefit of $1,566, half of Steve’s record.

Why Does This Matter For Early Retirees?

Early retirees will not have 35 years of W2 earnings.  Not only that, but it is their highest earning years that will be omitted.  This means that it is likely that an early retiree, even one with a high income, will not receive a large Social Security benefit.

While looking into options to see if it made sense to take action to increase my or Mrs. C.’s future Social Security benefits, I found that largely the answer is a resounding NO!

Because Social Security is so heavy weighted on the front end, most of the benefits are made with a lower income.  The higher benefits take a lot of earnings to make happen.

My Situation:

I currently am looking at leaving my W2 job at the end of 2025.  (This isn’t set in stone, but I am evaluating it.)  I started working in 2004, so I will have a total of 21 years of earnings that my Social Security benefits will be based on.  I will be 39 at the end of 2025, so I will have 23 years before I can claim Social Security retirement benefits.

At this moment it looks like my total indexed earnings will be around $1,260,000, giving me an AIME of right around $3,000.   With the current bend points my benefit would look like this:

• $1,174 X 90% = $1,056
• $1,826 X 32% = $584
• Total PIA = $1,640

If I wanted to increase my Social Security benefit by $500 a month I would need to increase by lifetime earnings by $656,000! Keep in mind, $500 a month is $6,000 a year, or $120,000 total over an expected 20 year retirement (age 67 to 87).

This would give me an AIME of $4,562.

• $1,174 X 90% = $1,056
• $3,388 X 32% = $1084
• Total PIA = $2,140

On average I am earning around $70,000 per year.  To reach this increase of $500 per month I would need to work an additional 9 years and 4 months.  Rather than retiring at 39, I would retire at 49. OK, so working almost 10 extra years would allow my Social Security benefits for life, issued from age 67 to my death, by $500 a month.

Including Increased Spousal Benefit: 

Mrs. C is entitled to a benefit of half my Social Security check, so rather than needing to increase my benefit by $500, I really only need to increase it by $333, since she would receive a $167 increase in this scenario.   I would therefor only need to increase my AIME to $4,145.  This would require $481,000 in increased income, which would be me working at $70,000 a year for 6 years and 10 months.

What About Mrs. C?

Mrs C.’s lifetime earnings are significantly less than mine.  Mrs. C. worked in the service industry and greatly reduced her hours in 2015 when we gained custody of her sister’s 2 young children when she passed away.  We pulled the trigger on her quitting her job in 2019, and it was the best decision we ever made for our family.

Her total lifetime earnings is around $250,000. Divided by 420 months is $595 for the AIME.

All $595 is against the 90% bend point for a PIA of $535.

She could increase her PIA substantially, since she hasn’t filled up the 90% bracket,  however, she is entitled to 50% of my check instead of taking her Social Security based off of her work record. With my PIA of $1,640, she would effectively have a PIA on her Spousal Benefit of $820.

In order for her to get any benefit increase to her Social Security from increasing her W2 income over time, she would need to cross this chasm of $285/mo to break even before any increase would occur.  So she would need to have an AIME of $911 in order to match this benefit, meaning she would need to earn an additional $132,000 just to break even with the spousal benefit she already qualifies for.  Assuming $15/hr and 30 hours per week, she would need to work an additional 6 years to reach this breakeven.

Now to get an increased benefit of $500 a month, she would need an AIME of $2,105, meaning she would need $884,000 in lifetime earnings, so she would need to earn an additional $634,000 over her current lifetime earnings to increase her benefit by $500 a month.  This would take 28 years.

Clearly, there is no benefit to attempting to increase Mrs. C.’s retirement benefit on her record.

Other Options To Get $500 a Month At 67

I certainly don’t want to work another 7 years to increase my Social Security benefit by just $500, which is the best case scenario outlined above. The next question is OK, what other option would I have to increase my retirement income by $500 per month by the time I reach 67 years of age?

Option 1: Increased investment into retirement accounts.

Assuming a 5% withdrawal rate, in order to generate $500 a month or $6,000 a year, I would need 20 times that amount in additional retirement savings.  $6,000 a year X 20 is $120,000.

Assuming 7% annualized returns I could reach this $120,000 figure by age 67, starting at age 39 by either A: Investing a lump sum of $17,000 OR investing $115 a month from 39 to 67.

This is of course not apples to apples.  The Social Security check is *guaranteed*, while the retirement account requires performance in the stock market over 3 decades.  In order to account for the added risk, rather than assuming 7% returns I could plan for 5% returns.  In that case I would need a lump sum of $30,000 at 39, or $165 a month from 39 to 67.

Since I am planning to retire at 39 and earn $70,000 per year, it stands to reason that I don’t need any W2 income for my bills at age 39, so I can invest all of my after tax earnings.  Working 6 months would earn me $35,000 and I could invest $30,000 after taxes.  This would push my retirement by 6 months but would ensure I would have an additional $500 per month in retirement.  This is WAY more efficient than working an additional 7 years!

Option 2: Purchase another rental property:

With a down payment of $20,000 I can purchase an $80,000 3 bedroom home in my area that is turnkey ready to move in.  I can currently rent this property out for $1,100 a month.  A 15 year mortgage at 8% is $575 a month. Taxes and Insurance will add another $125, while maintenance and misc. costs will add another $100.  This brings the total expenses to $800 per month.  This property will provide $300 of positive cash flow right off the gate, while paying itself off in 15 years.  If I buy this property at 39, it will be paid off at 54, at which point with no mortgage the cash flow would increase from $300 to $875.  In reality it would increase by substantially more.  15 years ago that house would have rented for around $600 a month.  If it increases the same in real dollars the rent will be $1,700 a month, bringing positive cash flow to $1,475.  Roughly 3 times as much as the Social Security increase I was looking for.

Option 3: Work In Retirement:

If I really wanted an additional $500 a month from 67 to 87, why not have a super part time job in retirement?  Taking the next 30 years off of work is already a massive lifestyle win and getting my Social Security checks at 67 will certainly be a boost to total household income.  If I wanted another $6,000 a year, I could do something productive to earn some money.  Assuming I could work in my field at a desk job, I would be able to earn around $50 an hour.  $6,0000 would then be 120 hours a year.  This is only 6% of the hours a normal year round employee works.

Why It Doesn’t Matter:

So yes, it seems futile to try to increase Social Security benefits for our situation.  We are on track to comfortably be able to live on just our rental portfolio income. Over time rents will increase, mortgages will get paid off (we did 15 year mortgages, with the oldest paying itself off in 2034), and our household expenses will decrease as children move out.  We also have a solid nest egg of retirement savings that should have 3 to 4 more doubling periods before we would access any of the money in retirement.  This squarely puts Social Security as an “icing on the cake” situation.

Do you plan to collect Social Security in the future? If so have you ran the math to figure out your best strategy?