By Dr. James M. Dahle, WCI Founder
Social Security benefits pay for the lion's share of the retirement of most Americans. According to Forbes contributor Andrew Biggs, a significant number of Americans rely on Social Security for 90% or more of their retirement income.
Even for high-income professionals, the target audience of this blog, Social Security will be a significant portion of retirement spending. For example, if I quit working today and began taking Social Security at age 70, I would get a benefit of about $2,600 a month. If I continue to work until age 70, that benefit will increase to perhaps $3,700 a month. In addition, my wife will be eligible for at least 50% of my benefit. That equals $5,550 per month or $66,600 a year, more than the median American household income.
If a typical physician retires with a $2 million nest egg, that would only support retirement spending of perhaps $80,000 per year. In that sort of scenario, the Social Security income would account for 45% of retirement spending!
How Does Social Security Work?
Since Social Security will make up at least a significant minority of our retirement income, it is important to understand how it works.
Social Security has two progressive features and one regressive feature. The regressive feature is that a high earner only has to pay Social Security taxes (12.4% of earned income—6.2% from the employee and 6.2% from the employer) on a certain amount of earned income. In 2022, that amount is $147,000.
The first progressive feature is that up to 85% of Social Security income is taxed in retirement, but only if you have significant other income (defined as $34,000 single or $44,000 married filing jointly in total income, including the Social Security benefit).
The second progressive feature—the one that says that additional payments result in less and less Social Security benefits—is the one we're going to talk about today.
More information here:
The Consequences of Ignoring Social Security
What Are Social Security Bend Points?
While progressive, the additional benefit you get from additional Social Security taxes paid is not a continuous curve. It has two bend points and looks like this chart, via Covisum:
Don't pay too much attention to the numbers on the chart, as they go up each year with inflation. I want you to pay attention to the general shape of the chart and to the axes.
Primary Insurance Amount (PIA): Shown on the Y axis, this is basically the Social Security benefit you will receive.
Average Indexed Monthly Earnings (AIME): Shown on the X axis, the more you earn (and pay SS taxes on), the higher your Social Security benefit.
As you can see, the chart starts out pretty steep. For a while (up to the first bend point), your PIA goes up by 90 cents for every extra dollar of earnings you pay SS taxes on. This is a fantastic investment. Basically, if you are below this bend point and retiring next year, earning an extra $100 a month (and paying 12.4% in SS tax on it) means you (and your employer) are “investing” $100 * 12 * 12.4% = $148.80 in exchange for an annual benefit of $100*12*90% = $1,080! Investing $149 and getting $1,080 EVERY YEAR FOR THE REST OF YOUR LIFE is an incredible investment.
Most Social Security “investments” aren't nearly this good, primarily because you don't make them the year before you start receiving the benefit. But they're still very good, especially below that first break point. Retiring before reaching that first bend point is actually pretty dumb given how awesome of an investment it is.
After your AIME gets past the first bend point, the deal is not nearly as good. Instead of getting credit for 90% of what you earned, you now get credit for only 32% of what you earned. Eventually, you reach the second bend point, where that figure drops even further, to 15% of what you earned.
How Much Do You Have to Earn to Get to the First Bend Point?
Where is that first bend point anyway? Well, it's not very far at all. But to understand exactly where it is, you have to understand how your AIME is calculated.
The first principle to know is that you must work and pay into Social Security for at least 40 quarters (10 years) to get anything from Social Security. Only 39 quarters? Too bad, so sad. Even if you earn and pay SS taxes on a ton of money for nine years, you're not getting squat.
The second principle to understand is that you must earn at least $1,510 (in 2022) per quarter to get credit for it. If you earn at least $1,510 x 4 = $6,040 in a year, you get credit for four quarters that year.
The third principle is that Social Security only counts your best 35 years (420 months). If you didn't earn for at least 35 years, the calculation uses $0 for all of the years you did not earn anything. In that respect, it doesn't matter if you earned just a little for many years or a lot for a few years (as long as it was at least 10 years). It all gets added together.
The fourth principle is that all of your earnings are adjusted for inflation. So, earnings made many years ago are worth more than earnings made in the last few years.
Got all that? OK, let's get started then.
It turns out that in 2022 the first bend point comes at an AIME of $1,024. You must earn and pay taxes on $1,024 per month * 420 months = $430,080 in today's dollars over 35 years to get there, or about $12,288 per year. Alternatively, you could get there in just 10 years if you earned $43,080 per year.
Good news! Most of you aren't going to have any trouble at all reaching the first bend point.
How Much Do You Have to Earn to Get to the Second Bend Point?
We can repeat the exercise for the second bend point. In 2022, the second bend point comes at an AIME of $6,172 in today's dollars. To get there, you're going to have to make a lot more money, and you probably won't do it in just 10 years.
$6,172 per month * 420 months = $2,592,240
You're going to have to earn millions over your career to get to the second bend point, but if you work a full 35 years, that's just $2,592,240/35 = $74,064 per year, certainly not out of reach for a professional who works a full career. What's the fastest you can get there? In 2022, the Social Security wage limit is $147,000. $2,592,240/$147,000 = 17.6 years. You'll basically need to earn at least the Social Security Wage Limit for 18 years.
If you're a physician interested in FIRE but want to make sure you hit that second bend point, you should plan on working at least a decade and a half or so out of training. Remember, you'll get some credit for your work prior to becoming an attending physician.
Maximizing Social Security Benefits
There is actually a third bend point, although few reach it. If you pay SS taxes on the Social Security wage limit every year for 35 years, you get zero credit for any additional earnings. It goes from 90% credit to 32% credit to 15% credit to 0% credit. Where is that point? In 2022, the wage limit is $147,000. Multiply that by 35 years and you get $5,145,000. Divide by 420 and you get an AIME of $12,250. What benefit would you get for that?
Well, you'd get 90% on the first $1,024, 32% on the next $6,172 – $1,024 = $5,148, and 15% on the next $12,250 – $5,785 = $6,465 so
- $1,024 * 90% = $922
- $5,148 * 32% = $1,647
- $6,465 * 15% = $970
- Total = $922 + $1,647 + 970 = $3,539 per month or $42,468 per year
If you're married, your spouse will qualify for at least 50% of your full retirement age benefit for a total of $63,702. Now, if you delayed to age 70 instead of taking it at the full retirement age of 67, it would be 24% larger, or $52,660. Note that the spousal benefit is 50% of your benefit at full retirement age, NOT your benefit at age 70, so it's not quite 150% of your age 70 benefit.
Yes, that's correct. Earning and paying the exact same tax rate on your last $6,465 only gives you a little bit more than paying on your first $960.
More information here:
10 Reasons NOT to Take Social Security Early
Social Security Calculator: Am I There Yet?
Unsurprisingly, the Physician on FIRE has spent some time thinking about this and has even developed a calculator to help you know when you reach each of the bend points. Just for fun, I put my earnings numbers (get them from your latest Social Security statement available at My Social Security) into his calculator. It spit this out when I first did this in 2020. Keep in mind that the figures for the bend points are slightly lower in this exercise than they are in 2022, but I think it's worth showing you this anyway:
As you can see, my AIME at the time was $4,793, so I was still a little bit below the second bend point of $5,875 and a long way away from maxing out my Social Security benefit. How many years of away was I (assuming I continue to earn more than the Social Security wage limit)? Well, you can get a quick estimate simply by taking $5,785 * 420 = $2,467,500 and subtracting my 35 years of indexed wages ($2,012,902) to get $454,598. Now, divide that by $137,700 and you'll get 3.3 years, about 17-18 years out of residency in my case.
Likewise, I could see how long it would take to maximize my Social Security benefit ($4,819,500 – $2,012,902 = $2,806,598 / $137,700 = Another 20 years and 16-17 years between that second bend point and the maximum level). Feels like a long time to work for not that much more benefit. Maybe there is another way to increase that benefit that doesn't involve working more.
What About My Spouse?
After many years without earnings while we were raising our children, Katie started working for The White Coat Investor a few years ago, allowing her to get to her 40 required quarters. She is now eligible for her own Social Security benefit. But I wondered where she was at in relation to the bend points and especially whether her benefit was higher than 50% of mine. I pulled her Social Security statement and plugged the numbers into the POF calculator, and this is what we ended up with:
As you can see, her AIME was $1,842 and her benefit at 67 would have been $1,146.37. That puts her well past the first bend point but still a long way from the second bend point. My benefit at the time was $2,090.44. Her benefit is now higher than 50% of mine, so at least we're getting something for those additional taxes we're paying.
Knowing where you are in relationship to the Social Security bend points may incentivize you to work a little longer or to retire a little sooner. Either way, it is good to know where you stand.
What do you think? Where are you in relation to the bend points? Will it change how much or how long you work? Comment below!
Mike Piper has written a great book on Social Security. His calculator is one of the best I have found.
Great tip thanks, I found that calculator and it is MUCH better than the basic my social security site, with links to other helpful places too.
The worst thing about the basic my social security site is that it didn’t make it easy/obvious how to model early retirement (“retirement” in the sense of no longer having an income, not in terms of taking SS). For example if you stop working at 50 then of course you’re not making those payments all the way from 50->62, but the basic site just wanted to know salary and not how many years that salary would really continue.
Great article. I spent a bunch of time crunching my own numbers and think I finally understand how SS works for the first time. Thank you!
Quick question: if I am already maxing out social security tax on my income (full $147,000*0.124), is there any drawback to my wife making an income? If my wife gets a job, she won’t also pay social security tax, will she?
Gabe, your wife will also pay FICA (Social Security) tax on her income, but that will enable her to collect her own benefits.
Unexplored in this article are opportunities for spouses of high earners to collect their own benefits early and then switch over to half their spouse’s later, increasing their total benefit amount.
That would be a great future blog post as I’m sure there are many physicians married to a lower but not zero earner. The spouse will qualify for social security on their own but curious how that benefits someone who already earns the 50% benefit from a higher earning spouse.
Greg,
There are a number of variables to consider, but very often what makes sense is for the lower earning spouse (LES) to claim SS at age 62 based on their own earning record, and then switch over to the higher-earning spouse’s (HES) benefits at a later date, allowing the HES’s’s benefit to increase based on delaying the claim.
All this depends on the age difference between the spouses, their relative health, their respective earnings records, and their ability to defer claiming beyond the retirement age.
The lower earning spouse will get the higher of either her/his own benefit or 50% of the higher earning spouse’s benefit at the higher earning spouse’s FRA. If the lower earning spouse takes benefits before her/his FRA, the benefit is permanently less. Survivor benefits are not lower though, if I recall.
Why not a past blog post?
https://www.whitecoatinvestor.com/single-income-versus-dual-income-families/
https://www.whitecoatinvestor.com/single-income-versus-dual-income-families/
https://www.whitecoatinvestor.com/avoiding-the-second-income-trap-with-a-side-gig-for-the-stay-at-home-spouse/
https://www.whitecoatinvestor.com/whats-different-for-dual-income-couples/
Still a great strategy, even if not mentioned here.
Yes she will. You should see the “gender pay gap” between Katie and I despite her working a lot more hours at WCI. Why does it exist? Social Security taxes. I’ve already paid all mine due to my clinical income, so an additional dollar paid to me only pays income and Medicare taxes. But an additional dollar paid to her pays income, Medicare, and Social Security taxes.
Also a great illustration for paying housekeepers and nanny’s on the books. They are most often on the steep part of the curve and benefit greatly from social security.
I always worried about the maids I knew of my friends’ families who continued working long into their senior years, probably since they had no alternative having been paid off the books (and in our town were often the major bread winner for children and grandchildren still). I knew I would feel a need to pension such a person off in that case and so it added to my incentive to pay SS for a pair of cleaning ladies we had hired the prior year when the labor secretary nominee or someone was named in a scandal for paying their staff off the books (I still thought there was a slim chance I or spouse might be named a general someday haha). Unfortunately when I asked them for their SSNs, offering to increase their pay so their net remained the same, they quit- I guess they had other benefits from not officially earning anything. Nowadays with more casual labor we have sorted out how to get poorer friends thru the Medicaid gap in our deep red state- “if you dogsit another $2K worth, you’ll be able to afford health care! Let us know if Cracker Barrel won’t increase your hours and we’ll leave town more.”
There are an awful lot of people cheating on their taxes (not reporting tips, working under the table etc) that are unknowingly hurting themselves.
If I am looking at this correctly, I think the statement “if you delayed to age 70 instead of taking it at the full retirement age of 67, it would be 24% larger, or $52,660 ($78,990 married)” is incorrect. The spouse cannot receive 50% of the benefits the recipient gets at age 70. She (usually it’s the wife) receives max 50% of the benefits due at the recipient’s full retirement age, NOT age 70. So I believe the full benefit at age 70 would be $73,894 instead of $78,990. And the spouse would only get the full spousal benefit if she waited until her full retirement age to apply.
My husband and I have just been through this process. He is 70 and I am 68. We waited until I turned 66 (my FRA) and then I applied for my benefits. Because he was born before Jan. 1, 1954, he was still able to get his spousal benefits on my record even though his benefits were considerably larger. He did not apply for his own benefits at the time I applied for mine because we wanted to maximize the total benefits. When he turned 70, this year, he applied for his benefits and I applied for my spousal benefits. As a result, we are collecting gross $49,020/year for his benefit and $18,570/year on my spousal benefit for a total of $67,590/year. He was not a doctor although he was a professional, and he did work many years with an income just above the maximum income that was taxed for Social Security. I just hope the politicians don’t take away Social Security and Medicare now that we have reached the point where we are collecting.
You’re right. Interesting that I learned that in between the time I wrote this post (like a year ago) and when it was published.
Your spouse’s 50% benefit is calculated on your FRA benefit. The higher earner should probably still delay, but it isn’t as large of a benefit as I said it was. I’ll fix the post.
If one delays claim SSI to 70, one’s spouse can only get 50% of one amount at ones FRA not his amount at 70. Please clarify this.
I believe that is correct.
Dr. Jim, thank you for always bringing the goods. I know you don’t like hearing this, but none of your other writers quite produce the material you can. I appreciate that you are still writing.
So for quick reference… if one spouse is close to the second bend (seems like a somewhat common place to be for a retiring high income professional), then the other spouse’s income only becomes beneficial some time after the first bend.
Thanks. We are constantly pushing to improve the quality of our writers, including me.
I suspect your rule of thumb is accurate but I’d have to do some number crunching to be sure.
I see as the years pass since retirement more accurate readings of future SS benefits- have already lost $900/mo in benefits by not working until 70. Worth every penny.
Yes, the ones SS sends you assumes you’ll be working until when you start taking benefits. Not the case for FIRE folks.
For a pre-retiree, I see Soc Security as having multiple uses to a long term investor. It functions as a tax preferred, inflation adjusted, no-default bond. Could allow higher Equity exposure in investment portfolios. A 60K yearly benefit functions as 1.5M bond portfolio using the 4% Rule. Why buy an annuity?
Soc Security after 62 can function as a contingency fund when the Market tanks. Same for disability.
Any politician who messes with Soc Security would be thrown out of Office. Worst case scenario is after 2034; Soc Security gives you a 25% haircut. Doubt even this will actually happen.
Continuing to pay FICA after the 2nd bend point is essentially worthless, nearly a pure tax. The self-employed essentially pay a huge tax with minimal return. My State and locality don’t tax Soc Security benefits enhancing return.
After five years of writing and updating my Social Security Bend Point post and spreadsheet, I finally have surpassed bend point #2 with 2022 income. It was reassuring to see that come to fruition after creeping closer to it each year since 2017.
My wife doesn’t have a strong earnings history, and if she doesn’t qualify with 40 quarters, or if her benefit would be less than half of mine, she can file for Social Security at full retirement age (67) and receive half of my FRA benefit as long as I’m still alive, and she would receive my full benefit if I happen to leave this world before her.
Note that she won’t receive half of the benefit I can take at age 70, but rather half of the amount I would have gotten if I had started collecting at age 67, my full retirement age. That works out to be about 40% of my age 70 benefit.
Is it true that a lower-earning spouse (but still with 40+ quarters of earnings) can take his/her own social security payment early (at age 62) and then once he/she reached FRA (67) then switch to 1/2 of spouse’s benefit? Seems like a neat trick
Yes, but the lower earning spouse will take a permanent reduction in benefits because of the early filing (before his/her FRA). This reduction will still apply when he/she switches over to spousal benefits, as well as to his/her own benefits taken at age 62. The reduction is around 30%.
Also, you can’t collect spousal benefits until the spouse applies for his/her own benefit. The lower earning spouse can’t just switch on his/her own. If the higher earning spouse wants to wait until he/she is 70, the lower earning spouse won’t be able to collect spousal benefits until the higher earner has applied for his/her own benefit at that age.
I’m not sure that’s true about the reduction to future spousal benefits from filing at 62.
This is from an AARP article on the subject. My understanding is that a person who collects SS benefits before FRA will have a permanent reduction, and that applies to future spousal benefits also if he/she switches over to them after his/her spouse applies for his/her own benefit. However, I don’t think the reduction applies to survivor benefits if the widow/widower has reached FRA, even if he/she took his/her own benefits or spousal benefits before his/her FRA. Of course, the deceased spouse must also have reached FRA before his/her death and before taking SS benefits for the survivor to get the full amount (or higher than the Primary Insurance Amount due at FRA if the deceased spouse waited until after FRA to collect).
Can I file for my Social Security at 62 and switch to spousal benefits later?
AARP
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En español
Only if your spouse is not yet receiving retirement benefits. In this case, you can claim your own Social Security beginning at 62 and make the switch to spousal benefits when your husband or wife files. Social Security will not pay the sum of your retirement and spousal benefits; you’ll get a payment equal to the higher of the two benefits.
If your spouse is already getting Social Security when you claim benefits, you are subject to the “deemed filing” rule. Under this provision, you don’t have a choice whether to wait and switch. When you apply for your retirement benefit, you’re also automatically deemed to be applying for spousal benefits, if you’re entitled to them. Again, Social Security will pay the greater of the two benefit amounts.
The top spousal benefit is 50 percent of your husband’s or wife’s primary insurance amount (the retirement benefit he or she is entitled to at full retirement age, which is 66 and 4 months for people born in 1956 and is gradually increasing to 67). You can get that maximum if you first claim benefits at your own full retirement age; the amount is reduced if you file earlier.
That includes if you file early for your retirement benefit — say, at 62, as in this scenario — and switch to spousal benefits later. Even if you are at full retirement age when you file for spousal benefits, your total monthly payment will be less than half of your spouse’s primary insurance amount, reflecting the fact that your initial Social Security claim came early.
Keep in mind
There are three exceptions to the deemed-filing rule for spouses. You can file what’s called a “restricted application” for just spousal benefits if any of these is true:
You were born before Jan. 2, 1954.
You are caring for a child who is under 16 or disabled.
You are eligible for Social Security disability benefits.
It’s possible I’m wrong.
The definitive resource in my experience is Mike Piper’s book on Social Security.
This is a link to the Social Security site on the subject. It even has a calculator so you can tell the effect of early retirement (before FRA) on spousal benefits.
https://www.ssa.gov/OACT/quickcalc/spouse.html
By the way, I really enjoy your emails. We are not doctors but you have some very relevant information to all who are interested in their finances. Thank you for this service.
Yes
I think there’s a mistake in this part:
“Basically, if you are below this bend point and retiring next year, earning an extra $100 a month (and paying 12.4% in SS tax on it) means you (and your employer) are “investing” $100 * 12 * 12.4% = $148.80 in exchange for an annual benefit of $100*12*90% = $1,080! Investing $149 and getting $1,080 EVERY YEAR FOR THE REST OF YOUR LIFE is an incredible investment.”
I think your annual benefit would increase by only $1080/35=about $31. For an inflation-adjusted lifetime annuity, that’s still a nice return on a $149 investment.
Earning an extra $100/month for only the year before you retire raises your AIME by only $100/35, or $2.86 (assuming that year is one of your top 35 years). If you’re below the first bend point, that would raise your PIA by $2.86* .9=$2.57, for an annual increase of about $31.
To really see an increase of $1080/year in payments, you’d have to earn (an index-adjusted) $100/month for 35 years (provided you were still below the first bend point, those were your top 35 years, etc.).
(BTW, long-time reader, first-time writer. Not a doctor, but still find lots of value in what you write. Thanks!)
I wouldn’t say it’s a mistake, but I suppose it could be clarified a little. If it confused you, it might be confusing someone else. Yes, you and your employer invest $149 a year throughout your career in exchange for $1,080 a year during retirement. Or alternatively, you invest $100 once and you get $31 extra a year.
So if there’s a dual income couple that maxes out social security for 35 years, what’s the max possible payout? Is it capped at 1.5x the high earner’s benefit (in this case either earner’s benefit), so $63,702? Or is it $42.468 *2 ? And if it’s the latter, does the math change at all for the 24% booster (for delayed retirement)?
No, both can get their full benefit. It’s the greater of your own or half of your spouse’s.
Very interesting, thank you!