If I Stop Working at 55 How Does That Affect Social Security?
Discover how an early career exit at 55 impacts your Social Security benefits, affecting your benefit calculation and future payout.
Many individuals consider leaving the workforce before traditional retirement age, and for those eyeing age 55, understanding the implications for Social Security benefits becomes important. Social Security benefits provide a foundational income in retirement, and the amount received is directly tied to an individual’s work and earnings history. The decision to stop working at 55 can significantly alter this history, potentially affecting future benefit amounts.
Understanding Social Security Benefit Calculation
Social Security retirement benefits are determined through a calculation that considers an individual’s lifetime earnings. This process begins by “indexing” past earnings to account for changes in average wages over time. Indexing ensures that earlier earnings reflect their value in a more current economic context.
The Social Security Administration then identifies the 35 years with an individual’s highest indexed earnings. These earnings are summed and divided by 420 (the number of months in 35 years) to arrive at the Average Indexed Monthly Earnings (AIME). The AIME directly feeds into the formula used to calculate the Primary Insurance Amount (PIA).
The Primary Insurance Amount (PIA) represents the monthly benefit an individual would receive if they claim Social Security exactly at their Full Retirement Age (FRA). The AIME is applied to a progressive formula with “bend points” to determine the PIA. This formula is designed to replace a higher percentage of earnings for lower-income individuals, applying different percentages to different portions of AIME.
How Stopping Work at 55 Affects Your Earnings Record
Stopping work at age 55 impacts the earnings record used to calculate Social Security benefits. Benefits are based on the 35 highest earning years. If an individual ceases employment at 55, they might not have a full 35 years of substantial earnings. For example, someone working from age 20 to 55 would have 35 years of earnings, but stopping earlier or having low-earning years means zero-earning years will be included.
Each year without earnings after age 55 will replace a year of lower or zero earnings from earlier in the work history. If an individual has fewer than 35 years of earnings, the Social Security Administration includes zero-earning years in the 35-year calculation, such as five years of zero earnings for someone stopping at 55 with only 30 years of work history.
Including these zero-earning years lowers the overall Average Indexed Monthly Earnings (AIME). A reduced AIME leads to a lower Primary Insurance Amount (PIA) because the calculation averages in periods of no income, diluting the impact of earlier, higher earning years. Therefore, stopping work at 55 results in a smaller Social Security benefit compared to someone who works for 35 or more years with consistent earnings.
Claiming Age and Benefit Adjustments
Even if an individual stops working at age 55, the age they choose to begin receiving Social Security benefits plays a role in the final monthly amount. Full Retirement Age (FRA) is the age at which a person is entitled to 100% of their calculated Primary Insurance Amount. This age varies based on the individual’s birth year; for those born in 1960 or later, FRA is 67.
Claiming benefits before reaching FRA results in a permanent reduction of the monthly benefit. Individuals can start receiving benefits as early as age 62, but doing so means accepting a reduced amount. For someone with an FRA of 67, claiming at age 62 can result in a reduction of up to 30% of their PIA. This reduction is applied because benefits are paid out for a longer period.
Conversely, delaying the claim for benefits beyond FRA can increase the monthly payment. Delayed Retirement Credits are applied for each month benefits are postponed past FRA, up to age 70. These credits increase the benefit by 8% per year for those born in 1943 or later. Therefore, waiting until age 70 to claim, even after stopping work at 55, can boost the monthly benefit amount, partially offsetting the impact of earlier zero-earning years.
Other Factors Influencing Your Social Security Benefit
Beyond an individual’s earnings record and claiming age, other factors can influence the Social Security benefit amount received. Eligibility for spousal or survivor benefits is one such factor. An individual may claim benefits based on a spouse’s or former spouse’s earnings record if that benefit would be higher than their own, which can be advantageous if their personal benefit is reduced due to early work cessation. Spousal benefits can be up to 50% of the worker’s full retirement age benefit, while survivor benefits can be up to 100% of the deceased worker’s benefit.
A portion of Social Security benefits may also be subject to federal income tax, depending on an individual’s “combined income.” This combined income includes adjusted gross income, any non-taxable interest, and half of the Social Security benefits. For some individuals, up to 50% or 85% of benefits may be taxable.
Lastly, if an individual returns to work while already receiving Social Security benefits and is still below their Full Retirement Age, their benefits may be reduced if their earnings exceed an annual limit. This limit applies only before reaching FRA. Once Full Retirement Age is reached, there is no earnings limit, and benefits are no longer subject to reduction due to work income.