When should you start collecting Social Security?

Question: I own my own medical practice and am approaching retirement. What issues should I be thinking about with regard to Social Security at this stage of my life?

Answer: There are many factors that you should take into consideration with regard to Social Security as you approach retirement.

First and foremost is the eligibility requirements for Social Security. To qualify, you will need 40 quarters of coverage (at least 10 years of Social Security earnings). Benefits are based upon your best 35 years of your indexed earnings. This means that the Social Security Administration takes inflation into consideration as they calculate your highest earning years. The maximum monthly benefit for 2007 is $2,116.

You can start receiving benefits as early as age 62, but at a reduced rate. For example, if your full retirement age, or FRA, is 65 and you start taking benefits at age 62, then your full benefit will be reduced by 20%.

Your FRA depends upon your birth date. If you were born before 1938, it is 65. Between 1943 and 1954, it is 66. And 1960 or later, it is 67.

If you were born between the years listed above, then your FRA is pro-rated on a monthly basis.

If you wait until after your FRA to start receiving benefits, you will receive credits until age 70. The credits amount to an annual increase of between 6% and 8%, depending upon your age. However, generally it is recommended that you start taking benefits no later then your FRA because the credits are not significant enough to warrant the additional delay.

If you continue to work after age 62, you can collect Social Security benefits, but they may be reduced. From age 62 until your FRA, generally, your benefit will be reduced 50 cents on every dollar earned over $12,960, the current wage minimum.

Earned income includes wages and self-employment income but does not include portfolio income such as interest, dividends or capital gains or other passive income such as pension income or IRA distributions.

Therefore, it may make sense to delay collecting benefits until after you stop working. Further, you may wish to take this into consideration if you are currently transitioning your medical practice to another doctor.

In general, Social Security benefits are subject to income tax. Up to 50% of benefits are subject to income tax if your combined modified adjusted gross income (MAGI) is more than $32,000 if you're married, or $25,000 if you're single, and up to 85% of benefits are taxable if your combined MAGI is more than $44,000 if you're married, and $34,000 for single. MAGI includes your adjusted gross income, tax-free interest, and 50% of your Social Security benefits.

If you are eligible and ready to receive Social Security benefits, you should apply two months before you would like to start receiving them. You may apply over the phone (800) 772-1213, online (link) or in person at your local Social Security Administration office.