4 Social Security Benefit Strategies for Physicians

When it comes time to think about your Social Security retirement benefits, many physicians don't often give the “when” and “how” adequate thought and planning. As a result, such an oversight might result in missing out on hundreds of thousands of dollars over their lifetime.

Here are four things for future physician retirees to know when it comes time to claim Social Security benefits:

1. Your full retirement age

You are eligible to start drawing Social Security at age 62 but it often pays to wait till your full retirement age, or beyond. If you begin your benefit payments prior to your full retirement age, you will be penalized and receive a lower monthly payment.

For those born between 1943 and 1954, full retirement age is 66. For those born from 1955 to 1959, add 2 months for each year, so for someone born in 1958, the full retirement age is 66 and 8 months. For those born in 1960 and later, full retirement age is 67. Delaying benefits beyond your full retirement age will increase your benefit by 8% a year up to age 70, so there is no benefit to continuing to delay payments past 70.

2. Your Social Security claiming strategy

There are a number of different claiming strategies that individuals and married couples can employ to help maximize their combined benefits over their lifetime. The strategy that might be best for an individual or couple has to do with a number of factors.

Those who are single have fairly straightforward decisions to make for claiming strategies, and the major factor has to do with expected longevity. In general, if you expect to live beyond age 80, you are likely better off waiting to start your benefits until age 70, assuming you can financially afford to wait.

For those who are married, factors may include the relative income earned during their working life and any disparity in age, among others. Two strategies that often work well together are “file and suspend” and “restricted application filing.” For example:

Dr. Bob is eligible for his full retirement benefit of $2,400 per month at age 66. His spouse, Karen, is eligible for her full retirement benefit of $1,000 per month at her age 66.

With a file and suspend strategy, Dr. Bob can file for his benefit at age 66, but immediately suspend the benefits and not take them. He will continue to accrue delayed retirement credits at 8% a year. At age 70, he can then begin collecting $3,168 per month.

With a restricted application filing strategy, Karen can file a restricted application at age 66, to begin receiving spousal benefits based on Dr. Bob’s record. Karen’s spousal benefit will equal half of Dr. Bob’s full retirement benefit amount of $2,400 per month, so she will receive $1,200 per month. Because Karen is not collecting on her own record, she will continue to accrue delayed retirement credits as well. At age 70, she can begin collecting $1,320 per month based on her own record.

3. Early timing can mean taxation of income

If you start worker or spousal benefits prior to full retirement age, you will be subject to the earnings test, and taxation of income may become a factor. If you start your benefits prior to full retirement age, then for an entire year, $1 in benefits will be withheld for every $2 you earn above a certain limit (the limit is $15,480 in 2014). During the year you reach full retirement age, your benefits are reduced $1 for every $3 you earn above a certain limit (which is $41,400 in 2014) until the month you reach full retirement age.

Once you reach full retirement age, your benefit is not penalized for any outside income you earn.

4. Your Social Security benefits will be taxed

Even after full retirement age, your Social Security benefits will be taxed. Many physicians do not realize the extent to which their Social Security income is taxed.

In 2014, if you file a federal tax return as an individual and your combined income (adjusted gross income + nontaxable interest + half Social Security benefits) is between $25,000 and $34,000 ($32,000 and $44,000 for married filing jointly), then up to 50% of your Social Security benefits is considered taxable income. If your combined income is above $34,000 ($44,000 for married filing jointly), then up to 85% of your benefits is considered income subject to taxation.

By knowing your retirement age, different claiming strategies and how you will be taxed, you can be in better control of your finances now and well into Social Security receiving retirement age.

Joel Greenwald, MD, CFP, is a physician-turned financial planner who exclusively provides financial advice to doctors. He has written many articles and been a frequent speaker on how physicians and dentists can achieve long-term financial security. More about Joel Greenwald and his Minnesota-based firm, Greenwald Wealth Management, can be found at www.joelgreenwald.com.

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