CMP Financial Planning

Should I Take My Social Security Retirement Benefit Early?


By Barry Jamieson, CFP®, MA

Most special needs families understand the critical role Social Security plays in the financial wellbeing of their loved one with a disability.  For families with children 18 or older the monthly Social Security Insurance (SSI) benefit represents a building block towards independence.  By itself of course, the additional monthly income is not enough to pay for the expenses of the person with a disability, but combined with other public assistance benefits, namely Medicaid, the work earnings of the individual, and other family resources, the SSI benefit is critically helpful.  Folks who work with Social Security know firsthand the challenge of working with this agency and the complexity involved in understanding its myriad of rules.  Adding to this complexity is the impact of one or both of the parents’ Social Security benefit can have on the child’s Social Security benefit.   This article discusses the impact of the primary wage earner taking Social Security benefits early on the overall family’s expected Social Security benefit.

SSDI versus SSI

First a quick primer on the difference between these two Social Security programs. (see http://www.cmpfinancial.com/social-security-disability-planning/   for a full discussion of these two programs) SSI is a means tested program, while Social Security Disability Insurance or SSDI is based on social security earnings (in most cases the parents’ earnings).  SSI considers the income and assets of the person with special needs and their family in determining benefits up until the individual’s 17th birthday. When the person with a disability turns 18, only their income and assets are considered in the benefit calculation.  Most individuals with a disability qualify for SSI benefits when they turn 18.

On the other hand, SSDI benefits apply regardless of the individual’s age as long as they have an established disability that began before age 22 and one or both of his or her parents are receiving Social Security retirement or disability benefits.  In 2018, the maximum monthly SSI payment for a single person is $750 per month. For SSDI, qualifying persons can receive 50% to 75% of the parent’s social security benefit, which, depending on the parent’s work earnings, can translate to a monthly income of up to $1,394 to $2,091 per month.  Benefits paid under SSDI are typically higher than SSI and, importantly, entitle the recipient to Medicare benefits two years after qualifying for SSDI.

The Impact of Taking Social Security Retirement Benefits Early on the Individual Retiree

For most persons who qualify for Social Security retirement benefits, there is a financial incentive to waiting to collect the benefit.  If one collects the benefit starting at the earliest age of 62, the percent reduction of the benefit compared to one’s full retirement age (which is between 66 and 67 depending on your age) can be up to 30%.  If one delays taking the benefit after their full retirement age, the benefit is increased by 8% for each year delayed up until age 70.    For the retiree thinking only about maximizing their individual benefit, the decision to delay comes down to judgements about one’s health: if the person is relatively healthy, then there is a financial benefit to delaying, if not, it is better to take the benefit early.  For someone contemplating collecting Social Security at age 62 versus age 70, Charles Schwab puts the “break even age”, that age where one collects more overall in benefits by delaying the benefit start date,  at somewhere between age 80 and 81.   There is an additional disincentive on collecting before their full retirement age.  For folks who continue working, and earn over the “earnings limit”, for 2018, $17,040, Social Security benefits are reduced by $1 for every $2 over the limit.

 The Impact of Taking Social Security Retirement Benefits on the Special Needs Family

For the special needs family, the early retirement decision needs to be carefully weighed against the impact not only on the individual retiree benefits but the benefits of the entire family.   As mentioned above, the individual with a disability qualifies for SSDI benefits when the parent begins collecting benefits, and these benefits are typically higher than SSI.  Importantly the level of the SSDI benefit is based on what the parent collects at full retirement age: the benefit is not reduced if the parent decides to retire early.   Adding to the complexity of this decision is the fact that the spouse also qualifies for the 50% of the worker’s benefit. The overall family benefit maximum is limited however, to somewhere between 150 to 180% of the primary worker’s benefit.   All these calculations and permutations can be overwhelming even for the most mathematically savvy folks among us.  The advantage of delaying benefits discussed above for the individual retiree generally applies to the special needs family: family maximum benefits are dependent on the life expectancy of the primary earner.  If the primary earner is expected to die early, it is advantageous to collect benefits earlier, if not, then it makes sense from a purely financial standpoint to delay benefits.   Of course, there are other factors to consider, one being the health care of the individual with a disability.  If the individual does not have health insurance, retiring early may make sense since the child would receive Medicare two years after collecting SSDI.

Although in many cases it may make sense for the primary wage earner to delay taking Social Security benefits, there are numerous exemptions to this general rule of thumb.   Not only are the financial considerations complex, but there are other factors to consider as well, like the possible impact on health insurance for the individual with a disability.   Talking to a benefits counselor at your local county board of developmental disabilities or finance professional who is well versed in Social Security can assist you in making this difficult decision.

 

References

  1. Davidow, Davidow, Siegel & Stern, LLP, August 2010, Your Retirement Age Can Affect Your Child’s Disability Benefits, August,2010

   http://davidowlaw.com/2010/08/26/your-retirement-age-can-affect-your-childs-disability-benefits/

  1. Williams, Rob, When Should You Take Social Security? December, 2017 https://www.schwab.com/resource-center/insights/content/when-should-you-take-social-security.

Social Security Administration.  Benefits Planner: Retirement https://www.ssa.gov/planners/retire/