Money Matters

Social Security disability benefits versus retirement benefits

August 25, 2012 

Q: I fortunately or unfortunately qualified for social security disability and have a few questions about retirement benefits. Next year I can take my pension early or I can wait and take a larger pension when I reach age 65. If I take my pension early, I don’t think that will have any impact on my social security benefits since it is not earned income; is that correct? Also, what happens when I reach the age where I can take social security retirement benefits? Would I be better off switching to social security retirement benefits versus disability?

Sorry about your disability but I’m glad you are receiving benefits. The pension won’t impact your disability benefits like earned income, but it may cause some of your benefits to be taxed.

If you are single and your combined income is between $25,000 and $34,000, 50 percent of social security disability or retirement benefits will be subject to income tax. If your combined income is more than $34,000, up to 85 percent of benefits will be subject to tax.

If you are married filing jointly, with combined income of $32,000 to $44,000, 50 percent of benefits will be subject to tax. If your combined income is more than $44,000, up to 85 percent of benefits will be subject to tax. Combined income is defined as your Adjusted Gross Income + Non-taxable interest + 1/2 of Social Security Benefits.

Full retirement age is based on your year of birth. For those born from 1943 through 1954, full retirement age for social security purposes is 66. For those born in later years retirement age increases two months a year until it reaches 67 for those born in 1960 and later. You can retire before you reach full retirement age, but your benefits will be permanently reduced by a percentage which is based on the number of months you begin benefits before your full retirement age.

Twenty-five percent is the maximum reduction for people born between 1943 and 1954. As the increase in retirement age phases in, the reduction for taking early benefits will gradually increase to 30% for those born in 1960 or later.

When you are receiving Social Security disability benefits and reach full retirement age, nothing will change except your benefits will be called retirement benefits rather than disability benefits. This switch will be automatically done for you by the Social Security Administration.

It is rarely a good idea to switch from Social Security disability benefits to early retirement benefits, because in most cases disability benefits are paid as if you are at full retirement age, no matter how old you are. The disability benefit amount is based on how much you paid into Social Security while you worked. If you are receiving a disability benefit from workers’ compensation, you may want to consider switching from Social Security disability to early retirement benefits. Your Social Security disability benefit is reduced by a certain percentage if you are getting a workers’ comp benefit. Your retirement benefit is not reduced by a workers’ comp benefit. If you are receiving workers’ comp, not yet at full retirement age but are age 62 or over, ask the Social Security Administration to calculate the difference in benefits for you. If this looks favorable, you can request to be changed from disability status to retired status.

Before making this status switch, get assurance that they will keep you technically disabled so that you can stay on Medicare. Also, analyze the impact on your future benefits as well as the impact on any benefits for dependents and, if married, those of your spouse.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624

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