EDITOR'S NOTE: This article was originally published in the July 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.
The Social Security Administration provides two types of benefits: income for retirement and income for someone who has a disability. So what happens if you are receiving disability benefits and are nearing retirement age? And how can a married couple make the most of a disability benefit and a spouse's retirement benefit?
Calculations for the two types of benefits differ in two basic ways. First, age is not a factor in determining the size of a disability benefit as it is with a retirement benefit. A beneficiary who claims a regular retirement benefit would get a reduced amount by claiming before full retirement age. But with the disability benefit, the year you become disabled is considered the year that you reach full retirement age in terms of paying benefits, says Jim Blair, a former district manager for an Ohio Social Security office and a partner at Premier Social Security Consulting, in Sharonville, Ohio.
The second difference: For retirement benefits, Social Security factors in your highest 35 years of earnings over your working career. Zero is calculated for any year without earnings. But with disability benefits, fewer years can be used to calculate benefits. And years of low or no earnings while on disability are not included when a retirement benefit is computed, says Tricia Blazier, a disability specialist for Allsup, a Social Security disability representation company.
If you are on disability and nearing the age for claiming Social Security retirement benefits, you don't have to take any action. At full retirement age, your disability benefits automatically convert to retirement benefits. "There isn't a difference -- the benefit amount doesn't change," says Ethel Zelenske, director of the government affairs office of the National Organization of Social Security Claimants' Representatives.
Married couples in which one spouse is receiving a disability benefit and the other is eligible for a retirement benefit can employ several strategies to maximize total Social Security income. Let's say the higher-earning spouse -- perhaps the husband -- is eligible for full retirement benefits but wants to delay until age 70. He can earn an extra 8% for each year he waits past his full retirement age, thus maximizing the survivor benefit for his wife. His wife, the spouse who is receiving disability benefits, will be able to switch to a higher survivor benefit when her husband dies.
But say it's the disabled beneficiary who is the higher earner and wants to maximize survivor benefits for a spouse. This beneficiary, say the husband, is already receiving benefits -- so how can he delay? Here's how: When the disability benefit converts to a retirement benefit at full retirement age, he "can voluntarily suspend the benefit and earn 8% in delayed retirement credits," says Elaine Floyd, director of retirement and life planning for Horsesmouth, a New York City-based consulting firm that works with financial advisers.
When it comes to spousal benefits, a person who is receiving a disability benefit can opt for a benefit on her spouse's record. Let's say the wife is getting a disability benefit, but a spousal benefit would provide more income. At 62, she can switch to a spousal benefit as long as her husband has applied for his retirement benefit. If she waits until full retirement age to claim a spousal benefit, it will be worth 50% of her husband's retirement benefit. It will be reduced a bit for each month she claims before full retirement age.
Married couples in which one spouse is getting disability benefits can employ the "restrict an application" strategy, which is available to other couples. Say the non-disability spouse -- in this case, the husband -- wants to delay until 70. At full retirement age, he can apply for a spousal benefit on his wife's disability benefit. And he can restrict his application to the spousal benefit even if his wife is younger than 62.
Like regular retirement benefits, qualified former spouses of a disability beneficiary can receive a spousal benefit. Eligible widows and widowers of disability beneficiaries can receive a survivor benefit. To learn more, go to www.ssa.gov/dibplan.