Week 48 Day 6: Social Security and Early Retirement: The FIRE Angle

Example: You retire at 45 after 20 years of high-earning work. Your 35-year average includes 15 years of zeros, significantly reducing your AIME. Your projected benefit at 67 might be $1,400/month instead of $2,400/month. But $1,400/month ($16,800/year) is still meaningful -- it replaces roughly $420,000 of portfolio (using the 4% rule). Even in early retirement, Social Security is a substantial asset. Some FIRE retirees consider working part-time or consulting to replace zeros in their 35-year calculation. Even $30,000/year of earnings for a few years can meaningfully increase the benefit by replacing zero-earning years in the formula.

For FIRE (Financial Independence, Retire Early) practitioners, Social Security creates a natural two-phase retirement: (1) Phase 1 (early retirement to Social Security age): the portfolio must cover 100% of spending. This is the most vulnerable period because the portfolio has no support from guaranteed income. (2) Phase 2 (Social Security age onward): the portfolio only needs to cover the gap between Social Security income and total spending. This dramatically reduces the withdrawal rate. A retiree spending $50,000/year with a $1,400/month Social Security benefit starting at 67 only needs $33,200/year from their portfolio in Phase 2 -- a 33% reduction in portfolio demand. This two-phase structure means the critical question for early retirees is: can the portfolio survive Phase 1 without being permanently depleted? The answer depends on Phase 1 duration and withdrawal rate. A 45-year-old retiree faces a 22-year Phase 1 (to age 67), requiring a lower withdrawal rate (3-3.5%) to survive market variability. A 55-year-old retiree faces a 12-year Phase 1, which is much more manageable. Social Security as a 'future annuity' reduces the required portfolio size at retirement: instead of needing $1,250,000 to sustain $50,000/year (4% rule), a retiree expecting $16,800/year in Social Security technically needs only $830,000 to cover the $33,200 gap -- though they need enough to bridge the gap years as well.

Pfau and Kitces (2014) analyzed the impact of Social Security on safe withdrawal rates for early retirees and found that incorporating future Social Security benefits into the retirement plan increased the sustainable withdrawal rate by 0.3-0.7% during the bridge years, depending on the number of years until benefits commenced and the expected benefit amount. The mechanism is that Social Security acts as a 'present value put option' -- its guaranteed future income truncates the left tail of portfolio failure scenarios. Even in the worst historical sequences (1929, 1966, 2000), Social Security provided a minimum income floor that prevented total depletion. For early retirees specifically, the WEP (Windfall Elimination Provision) and GPO (Government Pension Offset) are generally not applicable unless they also receive a pension from non-Social-Security-covered employment. However, the earnings test IS relevant: if you claim Social Security before full retirement age while still earning income (consulting, part-time work), earnings above $22,320 (2024) result in a temporary reduction of $1 in benefits for every $2 earned. The withheld benefits are not lost -- they are credited back to your benefit at full retirement age, effectively just delaying receipt. But this complication makes early claiming while still earning generally inefficient, reinforcing the case for delayed claiming. For FIRE practitioners with variable or sporadic income, the interaction of the earnings test, Social Security taxation, and ACA health insurance premium subsidies creates a complex optimization problem that benefits from careful year-by-year tax planning.