I’m back after a short break – a week on holiday in Cornwall, and another week just catching up. I’ll continue my withdrawal strategies series in due course, but this is another quick aside, which is related but not central to that series.
A lot of people in the FIRE community, especially on the younger side, tend to ignore Social Security completely in their planning. On one hand, I get that, and I do the same to some extent – I discount both programs by 50% in my planning. The fact that both of those will very likely exist in some form in another 3ish decades gives me some backup in case things go very wrong, and I think 50% is probably plenty conservative.
I do think it’s worth everybody having some sense of how much Social Security could be – even if not for spending planning, it’s worth considering for tax purposes, because for many people it will fill all or most of your Personal Allowance, especially when combined with any State Pension. But there are some complications that apply especially to Americans living outside the US:
- Many of us won’t have the full 35 years of earnings
- If you qualify for the UK State Pension (or other similar scheme), you’ll probably be subject to the Windfall Elimination Provision, reducing your Social Security payments.
So, I’ll walk through the three steps I’ve taken in order to estimate my own Social Security payments – I welcome any feedback on other ways of doing this, because it does get slightly long winded 🙂
If you haven’t read my intro to Social Security and State Pension for Americans in the UK, it’s probably worth glancing over that before diving into this post.
Step 1: Your Social Security Earnings Record
This one is pretty easy. First, log into your mySocialSecurity account (create one if you don’t have one yet). Annoyingly, the website is only open for part of each day – why a website can’t be open almost 24/7 is beyond me, but just plan around it.
When you get in, click on “Review your full earnings record now”:
Copy your record – we’ll paste it into a calculator in the next step. You may want to store your record in Excel or Google Sheets for easy future reference, especially if you want to do any planning when the Social Security website is closed.
For illustration, I’ll use an example earnings record. Let’s say that Jill earned $60,000 a year from 2010 to 2019, then moved to the UK in 2020 with zero earnings, and Jill is married to Jack, who earned $40,000 a year over the same time period. They were both born on 02 January 1985, and plan on working for another 20 years in the UK, qualifying for 57% (20/35) of the new State Pension.
Step 2: Your Primary Insurance Amount
Once you’ve got your Social Security earnings record, I recommend using the very useful Social Security calculator at ssa.tools. Note that this isn’t an official US government website, but I find it very useful and the security is such that I’m not worried about pasting my earnings record in, because it stays entirely on your computer (not that your earnings record is SUPER confidential, but probably not something you want out in the open).
Open up ssa.tools and click the big green “Get Started” button. The instructions on the site are pretty clear – you just need to paste your earnings history into the box. Here it is with our sample data for Jill:
Double check the numbers look good and press Yes. Put in your birthdate and then it brings up the report.
I recommend spending some time looking through this report – it does a great job of explaining how Social Security works, how future SS earnings would affect you (if you have any – you probably won’t live if you’re living in the UK, with a small caveat for self-employment).
Once you’ve had a look through, jot down your Primary Insurance Amount. If you’re married, repeat the process for your spouse.
In our example, Jill’s PIA is $1,103.10, Jack’s is $927.70.
Quick Aside – Social Security Bend Points
You may have noticed that Jill made 50% more than Jack every year, but her PIA is only 19% more than Jack’s. That’s because Social Security is intentionally tilted towards replacing a larger percentage of the income of lower income workers compared to higher ones. ssa.tools has a nice chart illustrating this, here’s Jack in green and Jill (almost) in blue:
There’s a more detailed explanation on the site, but the key is that “bend point” between 90% and 32%. That’s saying that both Jack & Jill get 90% of their “Average Indexed Monthly Earnings” up to a threshold (currently $996), but only 32% above that (and only 15% above $6,002 – that would mean about $72k in Social Security earnings over 35 years, or maxing out your SS earnings above about $142k for 18 years). So there are quickly diminishing returns to earning beyond the bend points.
This is actually a pretty good thing for many people who work in the US for 10 or so years before moving to the UK – you’ve gotten the most bang for your buck by filling up the 90% portion, even with only 10 years of work at a fairly modest wage ($40,000 is around the 34th percentile of US income, although would have been higher back in 2010).
Step 3: The Impact of State Pension & WEP
I really like the ssa.tools calculator, but one thing it doesn’t model is the impact of also receiving the UK State Pension. This triggers a Social Security clause called the Windfall Elimination Provision. There is another open-source calculator, Open Social Security, that handles WEP, and also has some nifty guides to help explore possibilities of when to start taking Social Security.
Bring up Open Social Security, and you’ll want to click the somewhat unobtrusive box at the top for special situations:
Then let’s fill out the form with Jill and Jack’s information – there’s a couple of things we’ll need to calculate first:
- State Pension amount: The full State Pension is £179.60 per week, but Jack & Jill will only get 57% (20/35) of that, since they only work 20 of the 35 years required for full benefits. Assuming a $1.40 to £1 exchange rate, that comes out to $622/month each.
- State Pension age: Check on the quick UK government calculator – for Jack and Jill, their State Pension age is 68, so they’ll start collecting State Pension in January 2053
- There is an option to delay taking the State Pension, we’ll look at that in a bit
- Your WEP-reduced Primary Insurance Amount. Two ways of calculating this:
- Simple Way: If you don’t have any more Social Security earnings planned in your life, the WEP is just half of the State Pension, so $622/2 = $311. Subtract that from your non-WEP PIA – for Jill, that’s $1,103 – $311 = $792, for Jack it’s $927 – $311 = $616
- Official Way: Use the official WEP calculator. Use your full retirement age (67 if you’re born in 1960 or later). Re-enter your earnings record, your State Pension amount from above, and it’ll spit out “Your monthly retirement benefit” – that’s your Primary Insurance Amount, reduced by WEP.
Now transcribe all that into Open Social Security:
The calculator then spits out a few different, interesting things:
- A recommended strategy for when to start collecting Social Security, including a table showing the various amounts by year.
- From playing around with it, this tends to be for the spouse with the lower PIA to file early, collecting their full benefit from age 62, then a WEP-reduced benefit when State Pension kicks in at 68, and for the spouse with the higher PIA to file as late as possible, collecting their WEP-reduced benefit from age 70.
- If the difference is large enough that the higher PIA spouse has a PIA more than twice the lower PIA spouse, the lower PIA spouse will get bumped up to 50% of the higher PIA as a spousal benefit, once the higher PIA spouse starts collecting.
For Jack & Jill, we see an initial annual benefit at 62 of $7,787 from just Jack, dropping to $5,174 when he starts getting the State Pension (although Jack and Jill each start getting $7,464 from the State Pension), and finally $11,785 from Jill when she start’s getting Social Security at age 70. From age 70, that means the couple is collecting $31,887 across Social and State Pension – a good chunk of change!
- The calculator also spits out a chart, showing how the benefits would change with alternative claiming strategies:
This is useful for seeing how big a difference it can make to claim earlier or later.
The calculator also let’s you explore some other variables. Here are two I think are particularly interesting:
What about cuts to Social Security?
As you’re likely aware, Social Security is not fully funded, and something will need to be done in the future to sustain it. That could be higher taxes, cuts to benefits, means testing, cancel the entire program and let seniors starve on the streets, etc. The actual choice is up to the politicians – without a crystal ball, I have no idea.
I think it is worth considering the possibility that benefits of current workers won’t be as high as they are today. There’s another option up top called “Possible Future Cut in Social Security benefits” – tick that box. If you scroll down to the bottom of the calculation input screen, there’s now an option to reduce the benefit by a percentage, starting in a specific year. Let’s look at Jack & Jill using the default of a 23% cut in 2034.
The calculator spits out the same kind of results, now just reduced by 23%:
Even at this reduced level, we’re still talking about more than $13k/year, plus whatever they get from the State Pension – enough to be worth considering.
How about delaying the State Pension?
This one isn’t built into the calculator, but isn’t too hard to do. There’s an option to defer taking the State Pension, which increases the benefit by about 5.8% for every year. So if Jack & Jill delay by 2 years to age 70, they’d get about $8,363 a year each instead of $7,464 (7,464*1.058*1.058). But, this bigger amount means their WEP goes up as well. Let’s recalculate that:
- Recalculate WEP and the after-WEP PIA
- Simple Way: Same as before, WEP is half of the State Pension. That’s $697 per month State Pension divided by 2 = $349.
- Jill’s WEP-adjusted PIA is now $1,103 – 349 = $754
- Jack’s WEP-adjusted PIA is now $927 – 349 = $578
- Or re-do the official WEP calculator with the deferred State Pension amounts.
- Simple Way: Same as before, WEP is half of the State Pension. That’s $697 per month State Pension divided by 2 = $349.
- Update the PIA’s on Open Social Security, change the month and year in which the State Pension will begin, and submit.
- The calculator spits out new results. For Jack & Jill, the key results don’t change too much, and the overall recommendation is the same:
- Initial benefit on just Jack’s Social Security is the same at $7,787 – there’s no impact until State Pension kicks in.
- Now that State Pension is delayed to age 70, the same age Jill starts collecting Social Security, there’s no intermediate stage – at age 70, Jill starts collecting $11,220 in Social Security, Jack’s drops to $4,855 due to WEP, plus they each get $8,363 in State Pension.
- That’s now a total of $32,801 a year from age 70, compared to $31,877 if they’d taken State Pension at age 68. About $1,000 more a year, but not getting any State Pension at all for 2 years – I won’t do the present value calculations, but in Jack and Jill’s case, that doesn’t sound like a huge benefit.
- Conceptually, this makes sense – State Pension increases at 5.8% a year, but for every extra dollar they get of State Pension, they lose 50 cents of Social Security, so you’re really looking at only 2.9% increases. That’s not very attractive, at least to me.
- Obviously, Jack & Jill is a hypothetical, and this is not a universal outcome – try out your own numbers.
So what do I do with this information?
Three key takeaways for me:
- If you have 10 years of US Social Security earnings at most full-time wage levels, you’re looking at a pretty significant benefit – often something north of $1,000 a month.
- If you don’t have 10 years of Social Security credits but you’re reasonably close, it may be worth thinking about how to get them. That might be delaying a move slightly (depending on your overall picture), using the totalization agreement, or maybe you want to do some self-employment in the UK and not elect out of paying Social Security taxes.
- Even if you don’t include this income in your retirement income planning, it’s worth keeping in mind for tax planning, especially when combined with State Pension.
- Even for Jack, with the lower income history and taking Social Security early, he’s looking at $7,787 in Social Security plus $7,464 in State Pension every year. That’s something close to £11k, which doesn’t leave much tax-free space in the £12,300 Personal Allowance for withdrawals from pensions, 401(k), etc.
- Jill would be over the Personal Allowance just with her $11,785 SS and $7,464 State Pension (about £13,750 in income).
- Throw in some Required Minimum Distributions, and you’re very quickly well into the UK 20% basic rate, maybe pushing into the 40% higher rate income tax.
- The timing of when to take Social Security gets complicated, especially for a couple with a mix of Social Security and National Insurance records. There’s no one answer, but it’s worth looking into more closely when you get close to it.
How are you accounting for Social Security in your plans? I’m curious to hear your perspectives.