Social Security Overview

That's correct. The title of this page says "Overview". :)

I will in no way try to explain Social Security or talk about the politics of it. And the discussion here will be limited to Social Security retirement benefits. Disability benefits are not part of this page.

But Social Security retirement benefits (and spousal benefits) are an important part of the full-time RVing plan for a significant number of people, so it deserves some discussion in the financial pages of this website.

Here I will discuss Social Security as it relates to planning for full-timing, and how Social Security benefits might be affected by exiting the rat race early. Just in case you have not picked up on it thus far, we sort of encourage that early "retirement" thing. :)

But we also recognize that there are many people looking to begin the RV lifestyle in their later years and may only be able to do so once they reach full retirement age.  So, we'll address obtaining Social Security at full retirement as well.

Ready? Here we go.

Why Talk About Social Security?

Well, the amount of Social Security folks receive often determines when the dream of full-time RVing may begin. It also may determine the budget and the lifestyle to be lived on the road.

So, we want to make sure that our readers understand how to predict what their Social Security benefits will be. For many, that goal may seem silly ("Of course we know what we will receive, we have been calculating for years.") but there are a lot of folks that are considering going on the road before Social Security benefits kick in. It can be tricky figuring out how their full-timing decision may affect the benefits they will see down the road.

Social Security Basics

The Social Security system is much too complicated to get into in great detail. So I will try to give you accurate information in a simple-to-understand discussion that may take liberties with the complexities.

In the United States, citizens are eligible for Social Security benefits once they have earned federally reported income subject to Social Security taxes for 40 quarters - 10 years (actually it's a whole credit earning system rather than strict quarters and years, but for simplicity, this is close enough).

According to the Social Security Administration website, Social Security will replace about 40% of the average worker's income and most financial planners say retirees will need, on average, about 70% of their pre-retirement income. See Understanding The Benefits.

Certainly, Social Security is not and has never been intended to be the sole source of post-retirement income for seniors.  It is supposed to be a supplement to private pensions, savings, and investments.

Full Social Security benefits are paid when a worker reaches age 65 - for people born in 1937 and earlier. The age increases for all those born in 1938 and later. For those born after 1959 (including Linda and I), the age will be 67. See Retirement Age Calculator.

Now, Social Security payments are available to all those eligible as early as age 62. However, the monthly benefit paid will be reduced by somewhere between 20% and 30%. See Retirement Planner: Benefits By Year Of Birth. The total benefits expected to be paid out is still the same, but the monthly payments are reduced because the total amount is paid over a longer period.

How Are The Benefits Calculated?

Each year of your earnings that have been reported for Social Security purposes is taken into account.

Note: Each year there is a maximum earnings figure at which social security taxes stop. The earnings over and above those maximums are NOT counted for benefit calculation purposes. See Your Retirement Benefit: How It Is Figured for a table of maximum earnings from 1955 - 2015. The maximum for 2015 was $118,500.

An "index" is applied to each year to make earnings early in one's career comparable to today's dollars.

Then, the highest 35 years of "indexed" earnings are averaged. A formula is applied to that "indexed earnings average" to determine the "Primary Insurance Amount" which is the benefit that would be received at full retirement age. See Your Retirement Benefit: How It Is Figured.

What about that "formula"? Well, like I said before, it gets complicated, and there is no easy set of tables or charts to see what formula is applied to your situation.

But in general, the higher that "indexed average earnings" figure, the higher your benefit will be. Now, with that said, the higher your "indexed average earnings", the less likely it will be that you will receive back in Social Security as much as you paid in.

Our Social Security system is considered a "progressive" system. That means that the lowest income folks that paid in the least amount of Social Security taxes will receive much more back in Social Security than they paid in taxes. The highest income folks will receive much less in Social Security than they paid in taxes.

So How Do You Know What Your Benefit Will Be?


Well, each year you should receive a Social Security Statement that projects what your monthly payments should be at age 62 and age 65 (or whatever your full benefits age might be).

This is great if you are still working and plan to keep the same job and salary until you are eligible for benefits. In that case, your statement should be pretty accurate.

But, if you are still a long way from age 62, there are a couple of major assumptions in the statement. First of all, it assumes that the law will stay the same until you start getting your benefits. Second, it assumes that your future earnings will be the same as your current earnings all the way to the date you start receiving benefits.

So the statement can be misleading if you do not plan to work all the way up to age 62, 65, or 67. Be careful relying on the statement as it might give you a false sense of security about your benefits.

However, the Social Security Administration website does have Benefits Calculators. So you can enter your own information and replace the statement assumptions about your future earnings with your more accurate assumptions based on what you know.

Here is the information you will need for the best estimates using the calculators: 1) birthdate, 2) earnings history by year, 3) anticipated retirement date (the date your earnings will cease), 4) anticipated date you want your benefits to begin, and 5) anticipated earnings between now and the day you quit.

You can also play with the calculators to check out different scenarios and see how your benefits might change. You may determine that staying with the job longer is not worth a few dollars more in benefits. :)

What Is The Effect Of Early Retirement On Social Security?

The Social Security Administration website considers "early retirement" to be retiring at age 62 or anytime before you would be eligible for full benefits. Under their definition of early retirement, the answer is easy. You will get 20% to 30% less in your monthly payment than you would at "full" retirement age.

However, I want to talk about the effects of retiring before age 62 - maybe at age 60 or 55 or 50 or even earlier. That information takes a bit more digging.

The biggest effect on your Social Security, if you retire early, has to do with how many years of eligible earnings you have. As mentioned previously, your benefits are calculated on your highest 35 years of "indexed" earnings.

What if you don't have 35 years in by the time you apply to receive Social Security? Well, they add additional years at $0 in earnings in order to calculate your indexed average to which the "formula" is applied.

Yikes! That can have an impact on your benefits.

Let's see how this works with a few examples. To make it easy, in all the examples we will assume 1) average annual "indexed" earnings of $30,000, 2) earnings started at age 20, and 3) you elect to receive benefits at age 62.

Example 1. You are age 60 and have 40 years of earnings. You have lifetime "indexed" earnings of $1,200,000 (40 years X $30,000). Your highest 35 years of earnings will be used, so the "formula" will be applied against $30,000. By working two more years to age 62 at $30,000 each year (or less), you will have NO effect on your Social Security benefits.

Example 2. You are age 55 and have 35 years of earnings. You have lifetime "indexed" earnings of $1,050,000 (35 years X $30,000). Your highest 35 years of earnings will be used, so the "formula" will be applied against $30,000. By working seven more years to age 62 at $30,000 (or less) each year, you will have NO effect on your Social Security benefits.

Example 3. You are age 50 and have 30 years of earnings. You have lifetime "indexed" earnings of $900,000 (30 years X $30,000). However, you have to have 35 years of earnings, so they will add 5 years at $0 per year. So now your $900,000 gets divided by 35 which equals $25,714 average indexed earnings. The benefits "formula" will be applied against $25,714 instead of $30,000. You're benefits will obviously be lower. By working five more years (to get to 35 years) at $30,000, you can increase your Social Security benefits. The question is whether the five extra years of work is worth the extra benefits. Once you get to the 35 years, working the additional seven years to age 62 at $30,000 gets you NO additional benefits.

Example 4. You are age 40 and have 20 years of earnings. You have lifetime "indexed" earnings of $600,000 (20 years X $30,000). However, you have to have 35 years of earnings, so they will add 15 years at $0 per year. So now your $600,000 gets divided by 35 which equals $17,143 average indexed earnings. The benefits "formula" will be applied against $17,143 instead of $30,000. Obviously, your benefits will be significantly lower. By working fifteen more years (to get to 35 years) at $30,000, you can increase your Social Security benefits. The question is whether the fifteen extra years of work is worth the extra benefits. Once you get to the 35 years, working the additional seven years to age 62 at $30,000 gets you NO additional benefits

In summary, once you have in 35 years of earnings, working all the way to age 62 at the same salary has little or no effect on your Social Security benefits.

So why would anyone continue to work to age 62 once they have the 35 years in? Well, you could still increase your benefits in those last few years if you expected your salary to increase significantly. That would raise the average earnings to which the "formula" is applied. But absent really big salary increases, the only financial reason to keep working is to use the extra income from working to pay off debts or increase the nest egg - it's certainly not to increase Social Security benefits. :)

Now, the Benefits Calculators can take into account these early retirement situations. So use them to see what you may or may not be giving up by retiring early!

Keep in mind that the calculators do not "pull in" the actual annual earnings you have in the system. They only work off what information you input, so the results are very "unofficial".

What Have We Learned In Our Social Security Research?

First, I have to tell you that Linda and I went on the road with absolutely no thoughts of Social Security. For years, we have assumed that it will not be around by the time we are eligible to receive benefits in 2025. So we didn't care about this subject in our situation.

As it turns out, Social Security will likely be around for us for at least a few years after our benefits would start. But treating it as if it won't has served us well.

According to the 2007 official Social Security Statements mailed to each individual, Social Security will have more benefits paid out than taxes coming in by 2017. And, unless things change, the Social Security Trust Fund will be exhausted by 2040. That's directly from the Social Security Administration.

Anyway, as we realized that Social Security is a huge planning issue for many of our readers, we wanted to see what the effects of us "retiring" with only twenty years of earnings recorded would be. Maybe we could shed some light on the issue for other "young" retirees.

Linda and I will both be eligible for Social Security as we have our 40 quarters (ten years) in. But we only analyzed my history for our purposes here.

We were able to determine that I will be eligible for about $900 a month at age 62 - assuming I have no additional reported earnings. That was a surprise!

However, if I had continued working for 15 more years (a HUGE "If"), and if I earned the same salary as when I quit (Another HUGE "If"), I would have been eligible for about $1,500 a month at age 62.

Hmmm. Fifteen more years of work for an additional $600 a month. I think we made the right choice as the odds of me working 15 more years at the same salary - and staying alive - were very low. :)

And by simplifying our life and changing our lifestyle, hopefully we won't need that extra $600 a month - especially since we never counted on Social Security in the first place and worked our plan to be debt free with some investments.

So, what else did we learn?

We learned that once you have 35 years of earnings in, working longer has very little effect on Social Security benefits. For most people, the difference in benefits between retiring in your mid to late fifties and retiring at age 62 is simply not worth the extra years of work when considering Social Security alone.

Now, if you are not close to having in those 35 years of earnings, the decision to quit early may be tougher especially if the nest egg is not where you would like it to be. It might make more sense to continue for a few more years. Or, it might make sense to quit the current job, but still find employment on the road where you will be an actual employee with traditional W-2 earnings rather than an independent contractor with 1099 earnings.

The Bottom Line

If you have ten years of W-2 earnings in, you are eligible for Social Security benefits.

The amount of those benefits is based on your average earnings over 35 years.

Once you have in 35 years, working additional years has very little effect on your Social Security benefits unless you have really big salary increases in those additional working years.

If you "retire" before having 35 years of W-2 earnings, you have to make a decision as to whether you want to continue working for increased Social Security benefits.

Use the calculators provided on the Social Security Administration website to help you make informed decisions.

If you are counting on Social Security for your full-timing lifestyle, pay close attention to the Social Security Statements you should receive each year in the mail. AND visit your local Social Security office often to get confirmation that you are thinking correctly in your plan.