Applying for Disability benefits has a reputation as a time-consuming and inefficient process. Consequently, many people entering their 60s who could potentially qualify for disability benefits may opt to just elect for Social Security a couple of years early to avoid the hassle. However, this strategy has the potential to cost you a lot of money in the long run. Whether opting for disability would be the more remunerative strategy will depend on your age. A financial advisor could help you weigh the best options for your retirement goals.
To be clear, when we say “Disability,” we mean Social Security Disability Insurance. If we say “Social Security,” we’re referring to Social Security Retirement Benefits. Additionally, the analysis presented here is based on the assumption that you are eligible to begin receiving either of these benefits, and therefore are at least 62 years old. If you’re younger than that, you’re not eligible to begin receiving Social Security benefits. In this case, your only option is to take disability.
Calculating Your Benefit Amount
The formula for calculating your Social Security benefits and your Disability benefits is exactly the same right up until the very end. We’ll get into how it diverges in the next section, but for now, we’ll focus on the shared process.
The first step is calculating your average indexed monthly earnings (AIME). The Social Security Administration (SSA) will take your 35 highest-earning years into consideration. For each of those years, it will index your income for inflation and include it up to the taxable maximum (the point at which you stop paying Social Security taxes). For tax year 2020, this point is $137,700.
Next, the SSA will add up these totals and divide to get your AIME. If you have more than 35 earning years, your lowest years will be excluded. If you have less, the SSA will include a $0 in the calculation for every year you’re short.
The last step is to calculate your primary insurance amount (PIA) from your AIME. To calculate your PIA, the SSA will take a percentage of three different chunks of your AIME. The exact amount of these portions will differ slightly depending on the year you become disabled or turn 62. If you do either in 2021 the SSA will take 90% of your first $996, 32% of the amount between that and $6,002 and 15% of anything that remains. The total is your PIA.
When Does Disability Pay More than Social Security?
Your PIA is the amount you’d receive if you were to qualify for disability benefits. It’s not that simple with Social Security benefits, however. While you’re technically eligible to begin taking Social Security benefits at age 62, you won’t receive your PIA until your full retirement age (FRA), which will fall somewhere between 66 and 67. At 62, your benefit amount would be only 70% of your PIA, increasing gradually until you reach your FRA.
This means that between 62 and your FRA, your disability benefit would be higher. And there’s an additional benefit to taking disability: By electing for disability instead of Social Security, you allow your Social Security benefit to continue growing.
This disparity is even greater if you happen to become disabled after you turn, say, 63. The reason here is that your Social Security benefits will be determined by your PIA for the year you turn 62, while your disability benefits would be calculated with your PIA for the next year. Provided your AIME is the same or higher, then your PIA for the later year will be higher.
When Does Social Security Pay More than Disability?
The reverse of the above situation is if you are between your FRA and age 70. After you reach your FRA, your Social Security benefit amount increases by 0.8% for every month you hold off on electing. This continues until you reach 70, at which point your benefit reaches its maximum. In this situation, your monthly Social Security benefit would be larger than your monthly Disability benefit.
It’s easy to get lost in all the different acronyms and calculations that come along with Social Security benefits. However, if you’re wondering if Disability would pay more, just ask yourself where you are relative to your full retirement age. If you’re under it, disability will be higher. If you’re above it, Social Security will be higher. Just like with any other Social Security issue, the way you can optimize your experience is by thoroughly understanding all of your options.
Tips for Navigating Social Security
- A financial advisor can help you account for the various sources of retirement income, including Social Security benefits. SmartAsset’s free financial advisor matching tool can pair you with up to three advisors in your area. Get started now.
- If you’re applying for Social Security disability benefits, you’ll need to fill out form SSA-827. This provides your consent for the SSA and Disability Determination Services (DDS) to view your medical records.
- Dealing with a disability, either temporary or permanent, is hard enough without considering the financial impact. Having an emergency fund in place for unpredictable things like this can be a huge relief.
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