Social Security Retirement and Disability Benefits
Did you know that Social Security is the most common source of retirement income? Many retirees depend on the steady payments as a major source of their retirement income, but there are other types of benefits as well. I get asked about this topic quite often, so I thought I’d tackle some of the more common questions.
First, let’s start off with a brief description of the types of benefits and how to qualify. Generally speaking, you can collect Social Security as a retirement benefit, to help you if you become disabled, in certain circumstances for your dependents, and as a survivor. For the scope of this article, we’ll focus on retirement and disability benefits.
To qualify for retirement benefits, you must earn a certain number of credits (basically quarters of working and paying into the system). You need at least 40 credits (10 years for most of us) to qualify for retirement benefits. From there, there is a formula that takes into account your 35 highest years’ earnings (there is a cap on how much is considered) to determine the benefit that you are eligible for.
Depending on when you were born, your full retirement age can range between 65 and 67, but you can select to take your benefits as early as age 62 (assuming you have paid into the system for long enough, of course). The age you take your benefit has an impact on two things. The amount of your monthly benefit will be decreased up to 30% (for those born after 1960) the earlier you opt to take benefits. It could also be increased if you decide to delay benefits, and both options should be considered in a full financial plan to help determine whether they make sense for you.
Your age also will have an impact on how much you are allowed to earn while collecting. If you are younger than full retirement age, your benefits will be reduced by $1 for every $2 you earn. It’s $1 for $3 in the year you reach full retirement age, and afterwards you can go earn to your heart’s content without affecting benefits.
Generally, it’s a reasonable expectation that your benefit will increase over time to compensate for inflation (though probably not enough to offset taking money early). Your spouse can also qualify for benefits based on your amount if you pass away or if your amount is significantly larger than your spouse would otherwise qualify for. That’s beyond the scope of this article, but something to keep in mind or to ask us about.
Now let’s shift gears to disability benefits—the other area it’s not uncommon for me to be asked about. Qualifying for Social Security Disability benefits means meeting specific criteria. The program is intended to aid those who aren’t able to work. Again, a minimum number of work credits have to have been earned, and the required amount goes up as you age. Your condition must be considered “severe.” Depending on the disability, there may be other qualifications as well, such as an assessment of your residual functional capacity (the ability to do basic work-related things). We could dive in considerably deeper, but as you can see, it’s intentionally difficult to qualify in order to prevent abuse of the program.
There are different types as well. SSDI provides disability benefits if you qualify as disabled. SSI, on the other hand, is a supplemental disability benefit that is more needs based (i.e. you have little to no assets and no meaningful source of income). While income earned from working will affect either benefit, certain types of incomes (such as an inheritance or redemptions from an IRA) will only affect a supplemental SSI benefit.
Another item of note is that Social Security Disability benefits are not easy to qualify for as we have seen. Unfortunately, during your working years your odds of suffering from a disability are actually considerably higher than they are of passing away early. According to SSA.gov, the chances of a 20-year-old worker suffering from a disability before retiring are 1 in 4! Because of the difficulty of meeting SSDI’s criteria, it’s absolutely worth investigating a disability income insurance policy—especially if others in your family depend on your income to survive.
The takeaway here is to be aware of the requirements to qualify for various programs. You should note that your benefits can change based on age, and also that earnings can affect your payment. Social Security alone may or may not be enough to suit your needs for retirement or in the event of a disability, so it’s worthwhile to run some numbers to predict what might happen in various situations. If there is anything we can do to be of assistance, let us know!