I’ve written a lot about financial freedom and retirement for doctors. However, up to this point, I’ve effectively ignored one important component of that planning: Social Security.
So, how should doctors account for Social Security in their retirement planning and when should doctors begin accepting payments?
First, let me begin by explaining why I have 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, the simple equation to figure out your goal nest egg for financial freedom is: 4% = $X/nest egg. But any passive income diminishes the goal nest egg that you need to save. And Social Security is effectively government-funded passive income for retirees. By ignoring that source of “passive income,” we inherently overestimate how big a nest egg we need, which is not a bad thing. Social Security becomes the cherry on top.
Of course, there’s the looming question of: 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 don’t think it is going anywhere. But, if it ever did go away, you won’t miss it if you never accounted for it. I still don’t include it in my calculations. And I encourage others not to, purely for the behavioral/psychological reason of being overly conservative.
But, it is still important to understand how Social Security works and how doctors, as high-income earners, should use it to their advantage. (A lot of the information I learned came from The Doctors Guide to Smart Career Alternatives and Retirement, by Cory Fawcett, MD.)
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.
When Should Doctors Begin Accepting Social Security Payments?
Your first choice 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).
If you begin taking payments at age 62, then you get a lower monthly benefit than if you wait until later, like age 67 or 70. So, if you wait, your benefit is greater but you lose out on the money you could have been receiving in previous years.
If you are still working, the point is moot. You need to wait until you retire 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?
Well, every year you wait, your risk of dying increases. And your chances of collecting another month of a higher benefit payment decreases.
Credit to Fawcett for running this data: 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 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.
A Bigger Problem With This Equation
Because we are high-income earners with the ability to prolong our high-earning years if needed — and because we didn’t include Social Security in our nest egg calculation — we shouldn’t need the Social Security money to live on.
Usually, people cite that reason for waiting to take a higher payment in the future. The need. But 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. Instead, you need to account for the interest that would accrue by investing a lower sum taken earlier on.
In this example, we are using the substitutive principle. You use your Social Security payments to cover expenses in retirement, while allowing your retirement savings to stay invested and grow.
Again, credit to Fawcett for this calculation, but if we take interest into account, the breakeven age is 90 years (assuming a 6% investment return and not accounting for taxes). The number is variable but it’s an effective demonstration.
What’s the Verdict?
Well, living to age 90 is a long way away. And not many people live that long. So, the better bet is for doctors to take the full Social Security benefit as soon as possible and invest.
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 may be even higher than 90.
Here are the scenarios laid out:
- 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, wait 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!
Jordan Frey, MD, is a plastic surgeon at Erie County Medical Center in Buffalo, New York, and founder of The Prudent Plastic Surgeon.
Looking to improve your financial well-being? Check out Frey’s online course, Graduating to Success, a comprehensive and interactive 12-module course that helps doctors achieve personal, professional, and financial success during and after their transition from trainee to attending. Or read his best-selling book, “Money Matters in Medicine.”
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