I’ve talked a lot about financial freedom and retirement for doctors on this blog. However, up to this point, I’ve effectively ignored one potentially very important component of that planning for doctors…social security.
So, when should doctors take social security?
But first…
Why have I ignored social security so far?
The reason is simple. I’ve ignored social security when discussing financial freedom and retirement to be overly conservative in our estimates.
Remember from this post, the simple equation to figure out your goal nest egg for financial freedom is: 4% = $X/Nest Egg.
But, as we discussed recently in this post, any passive income diminishes the goal nest egg that you need to save up. And effectively social security is government funded passive income for retirees.
By ignoring that source of “passive income,” we inherently overestimate how big a nest egg we need by a bit. Which is not a bad thing. Social security becomes the cherry on top.
But what if social security gets defunded?
This tends to be the reason that most people ignore social security in their retirement calculations. But it’s not mine.
Social security is a very popular program across political lines and I think is not going anywhere, especially with the government’s ability to print money.
But, if it ever did go away, I guess you won’t miss it if you didn’t count it in your calculation to begin with.
So, should doctors include social security or not?
I still don’t in my calculations. And I encourage others not to as well. But not because it won’t exist. It’s purely for the behavioral/mental finance reason of being overly conservative.
But, it is still important to understand how social security works and how to doctors, as high income earners, should use it to their best advantage.
And I’d like to mention here that I learned a lot of the information here from Cory Fawcett in his awesome book, The Doctors Guide to Smart Career Alternatives and Retirement.
How social security works
Social security is essentially a government funded retirement plan. In basic terms, you need at least 10 years of work (40 credits) to qualify for Social Security retirement benefits.
The government bases the amount of your benefit on your highest 35 years of earnings. If you do not have 35 years of earnings by the time you apply for retirement benefits, your benefit amount will be lower than it would be if you worked 35 years.
And then you receive that benefit until you pass away.
However, you have a choice of when you begin to take those benefits. And that decision impacts how much your benefit is as well as the future impact of that benefit.
Let’s explore…
When should doctors take social security?
Your first choice when it comes to social security is whether you begin to take a partial benefit beginning at age 62 or wait until you can receive a full benefit at age 67 (if you are born in 1960 or later like me).
And it’s important to note that you can take social security if you are still working.
Examining the decision
The nuanced decision that comes into play is deciding when to take your full social security benefit.
If you decide to begin taking social security as soon as possible at age 62, then you get a lower monthly benefit than if you wait to take it until later, like age 67 or 70. Your amount is actually 30% lower if you take it at age 62 rather than age 67.
So, if you wait, your benefit is greater but you lose out on the money you could have been receiving all the years that you didn’t take social security.
Again, if you are still working, the point is moot. You need to wait until you are no longer working to take the benefits without penalty. But let’s assume you are ready to stop working at age 62. Should you take social security right away or wait?
Which is better?
Well, every year you wait, your risk of dying increases. And your chances of collecting another month of a higher benefit payment decreases.
And credit to Cory Fawcett for running this data, but using a linear equation, the breakeven point for this decision is age 79. If you live past 79, it’s worth it for doctors to wait before collecting social security. If you don’t live past 79, then collecting earlier right when you reach full retirement age is the better option.
The problem of course is that we don’t know when we will die. But we do have some idea of our health and could make an educated guess.
But there’s a bigger problem with this equation?
Because we are doctors and high income earners with the ability to prolong our high earning years if needed plus we didn’t include social security in our nest egg calculation, we shouldn’t need the social security money to live on.
Usually, that is the reason people cite for waiting to take a higher payment in the future. But in reality, if you don’t need the money to live on, you could take the earlier, lower social security payments and invest that money.
So, figuring out the breakeven point is not a linear equation. You need to take into account the interest that would accrue investing a lower sum taken right away at full retirement age.
And in this example, we are using the substitutive principle. You take your social security payment and use it to cover expenses in retirement. That allows you to keep the same amount of money in your retirement accounts rather than withdrawing it to cover your expenses. So the effect is the same as having an amount equal to your benefit continuing to accrue in a retirement account.
Again, credit to Cory Fawcett for coming up with this graph using his numbers, but if we take this interest into account, the breakeven age is 90 years.
This graph doesn’t take taxes into consideration as one could invest in a Roth option with the social security payment. But it also assumes a 6% investment return. So that may cancel out.
Either way, it’s an effective demonstration.
So, what’s the decision?
Well, living to age 90 is a long way away. And not many people live that long. So, the better bet then becomes that doctors should take the full social security benefit as soon as possible and invest that money.
It becomes even more clear if one is able to be more tax efficient or get higher returns on their investment. Then the breakeven age is even higher than 90, over 100.
The final verdict
Here are the scenarios:
- If you need the social security benefits to cover expenses, keep working
- If you really can’t keep working clinically or non-clinically (a near never event), take the early benefits
- If you continue to work past age 62, with to take benefits until full retirement age to avoid penalties. As soon as the penalties no longer apply, take and invest the money
- If you retire at or before age 62, take the money early and continue to invest a commensurate sum in your retirement account
Managing this decision can impact your decision and ability to achieve financial freedom and retire when you want!
Here are some additional resources to help you prepare your nest egg for financial freedom!
- How Much Is Enough Retirement Savings?
- An Updated Quick and Dirty Guide to All Types of Investment Accounts for Doctors
- 5 Important Tax Tips for Physicians
- 7 Small Things Doctors Can Do to Get Their Finances on Track
What do you think? When should doctors take social security? Early to wait? What do you plan to do? Let me know in the comments below!
Is it true that when at doctor’s office it’s not rquired to give your social security number when they ask for it? why do they ask for it then?
Most physician offices don’t ask for the social security number. There is no need for it. Don’t give it. Insurance companies don’t need it.
Hmm good question I’m not sure!
I don’t think doctors should take social security numbers. It introduces privacy and security risks. Patients should have the option of giving insurance ID number. Even driver’s license would be better.
Jordan,
Thanks for sharing my writing with your people. The math says it all.
Hey dude, nice post though I don’t think your verdict is so easy given delaying social security is a guaranteed increase until age 70 as well as it is inflation adjusted. Very hard to model that. Also taking social security early will eat into the benefit of doing Roth conversions before RMD’s kick in. I have to disagree with you. Most doctors with predicted longevity on their side should delay social security to 70.
I did You’re absolutely correct!
The math is simple. You need to receive Social Security for 12 years to get back all of the money you and any employers you had contributed to the program. And that is just the raw amount of money…no interest, no compounding, no capital gains, just the dollar figure as indicated on your Social Security annual statement.
Yes, if you retire from full time work at age 62, only work a minimal amount earning less than $20,000 per year in wages, and you live on other income and you invest your Social Security checks every month, you will come out ahead instead of waiting until age 67.
For men, you will be lucky to live to age 79.
Age 79 is the break even point for taking Social Security at age 67.
So now all the financial gurus are starting change their recommendations to take Social Security at age 62 if you can.
And there is a risk Social Security benefits could be reduced 23% in just 9 years.
A bird in the hand is worth two in the bush. Take it when you can.
No one mentions that your spouse gets your social security amount after you die if she earned less than you did. That could be a very large amount every month. Why is that not included in the discussion??
A great point but not quite totally relevant to this exact discussion
It is very relevant. Delaying the date that you start collecting will increase your spouse’s survivor benefit if you die first, and also increase his/her spousal benefit while you live (where your spouse can collect half of your benefit, if that amount is higher than what the spouse would qualify for based on his/her earnings). If this applies to your situation, as it will for many physicians with a lower-earning spouse, it is a large incentive to wait until at least full retirement age to collect. Not considering this in the article’s analysis gives an incorrect answer for optimal age to begin collecting.
I would argue that at the time the doctor start collecting Social Security. They should be financially free such that the spouse will be if one dies first. Further, one is not financially free at that point they should still have term life insurance for the spouse.
It is relevant. A spouse can either collect their own social security earnings, or half of their spouse’s, whichever is greater. In the probably common case where the physician is male, makes substantially more than his wife, and is often a little or a lot older, statistically they will die before their wife. By delaying collecting social security to 70 they maximize what their wife will collect for the rest of their life.
EXACTLY! Thank you, sheesh. The whole calculation is just about the physician (him)self. The spouse and any children she supports are not factored at all. And they’re not relevant?! My wife is 12 years younger than me, and earns far less. She can take my SS until she dies, hopefully well after me! Of course I wait as long as possible.
I was disabled at age 48 (currently 74) Social Security has been impressive. You get a cost of living increase nearly annually. Those matter. They compound. My benefits now are well over twice what they were in the beginning. They play a role in allowing us to leave our retirement funds invested.
Additionally, we have been hearing people threaten to eliminate or reduce social security payments for decades. My guess is that they will change the rules for people who are not already receiving benefits, as they have. They will have a much more difficult time changing them for existing beneficiaries.
The normal advice is for people to wait as long as possible to take Social Security if you don’t need the money before that and you think you will live a reasonably long life . I will point out one big exception to the rule that no one ever told me and that is if you have younger children, such as a second marriage In this case, you are paid up to an additional 50% of your calculated Social Security benefit for your children and this continues until age 18 If you have a divorced spouse, who also shares custody with the children, the spouse will get money until the children reach age 16. This almost doubles your monthly Social Security benefit When you factor in this additional little known aspect of the law, the equations vastly favored taking it as soon as possible
I’ m waiting until 70. I leave SS out of retirement planning/accounts. This way SS is used as a hedge against:
-Me dying a day after I turn 70 and therefore leaving my widow a much larger monthly payout. As a bonus COLAs will be much larger as 3% of $3,000 is much less than 3% of $5,000.
-Higher taxes.
-Higher health care costs
-Higher inflation.
No offence but not everything can be mathematically modelled.
Hi Kieran. Your spouse’s benefit only goes up if the spouse waits until full retirement age to start getting their benefit. After that, the spousal benefit won’t increase further. My spouse will take benefits at her full retirement age, then I will take benefits at age 70. That will allow us to maximize our benefits.
This is the best free online social security calculator that allows you and your spouse to maximize benefits.
https://opensocialsecurity.com/
For clarification, if you are over age 62 you can certainly take your SS money even if you are working full time! I decided to start taking my full benefit at age 65 and I was still working full time then. I retired 7 years later. My husband delayed his benefits until age 70, but also still sees a limited number of patients and thus earns money.
(And I just double checked this on SS website in case the rules had changed unbeknownst to me.)
Yes! Thank you for clarifying!
If you take SS while still working and you make too much, they will take the benefits back.
For 2024, the earnings limit is $21,240. If you earn more than this amount, your benefits will be reduced by $1 for every $2 you earn over the limit.
First, my full retirement age was 66. If I started at 62, my benefits would have been reduced by 25%. You don’t seem to mention that for every year you work past your full retirement age, you get an additional 8% increase in SS benefit. For me that would be an additional 32%, nothing to sneeze at. However, at 68, I had some medical problems and I thought “what benefit is this to me if I die at 71 or 72?” My calculation was that I had to wait until 81 to break even if I worked until 70 (assuming I did not invest my SS benefits until I turned 70). So I took mine at 68.
You can draw SS at 62 and continue working with a small penalty. After you reach full retirement age, you can work all you want and draw SS without penalty.
Excellent article. You had mentioned that ‘If you do not have 35 years of earnings by the time you apply for retirement benefits, your benefit amount will be lower than it would be if you worked 35 years’.
Many Physicians will not have worked as Attendings (making good salaries) for 35 years by the time they are 62, and even 67. How does this SS payment reduction for each year less than 35 years factor into your thoughts of when is best to take SS benefits?
Great question! Unless it was a major difference like 5-10 years I would err on the same decision in my opinion!
I don’t think it makes a difference other than you might not receive the maximum possible benefit. The key thing to consider is that every year after 62-years-old that you delay collecting, up to 70-years-old, the amount will increase by 8%. Unless you life expectancy is below average, and may even then if their are spousal considerations, delaying is financially worth doing if you can afford to do so. Although you can collect earlier and invest the difference, it’s hard to beat a guaranteed 8% return.
The arguments for and against seem somewhat moot to me given that we are talking about high earners who (presumably) have saved for retirement and should have a comfortable nest egg along with homes with no mortgages. Take the Social Security when you reach full retirement age and let it fund some wonderful vacations. All these ideas to maximize a few extra dollars return. You worked hard and denied yourself much free time – use this “extra” money to enjoy what is left of your life and depend on your investments to fund your retirement.
I have left this comment on other “When to take…” articles. The articles look at the decision only as an individual. Most of us, I hope, have a spouse involved. This greatly complicates the decision unless you have been blessed with a stay-at-home spouse. With ONE high earner and one low earner, the decision is rock solid simple, Take Social Security when both the high and low earner reach full retirement age. The low earner then gets HALF (!) of the high earners benefit. This increase for the low earner more than makes up for any consideration to wait for high earner’s benefit to climb. My wife’s minimal benefit shot up more than $ 1,000 / month.
I’m taking my social security at 62. Not that hard of a decision. Several are commenting about the 8% increase per year in SS benefits by waiting. That is NOT true from 62 to 67 (for a full retirement age of 67, it’s 5% from 62 to 64, and 6.67% from 64 to 67). In any event, the increase in SS by waiting is taken into account in Corey Fawcett’s illustration. I encourage all to “run their own numbers”. Also there is NO penalty for working while on “early” social security! The benefits are partially or fully withheld but you get them back later! Also, if you have a special needs child, your son/daughter will get bumped up from SSI to SSDI when a parent goes on SS. Finally, I strongly recommend to include SS benefits in your retirement planning. If you think the program will be cut, maybe include only 70% of anticipated benefits. Many people “stack” multiple conservative just-in-case factors (no social security available + poor investment returns + higher expenses than anticipated + etc). This results in working way longer than you need.