Most people know that Social Security offers both disability and retirement benefits. For disability, you have to prove you’re disabled, but for retirement, you just have to be the right age. What happens, though, if you’ve reached (or are close to) retirement age, and you’re also disabled?

Even if you haven’t reached your normal (full) retirement age, you can retire as early as age 62 and receive a reduced retirement benefit. The amount of the reduction varies depending on how long you have until your normal retirement age. For the first 36 months you’re retiring early, the reduction is 5/9 of 1% for each month you’re retiring early. For each additional month more than 36 months early, the reduction is 5/12 of 1%.

Here’s how that works in practice: Say you were born in 1954, and you want to retire at age 62, in the year 2016. Your normal/full retirement age is 66, so you’d be retiring 4 years, or 48 months early. The first 36 months get you a 5/9 of 1% reduction each month, and the other 12 months get you a 5/12 of 1% reduction each month.

36 months x 5/9 of 1% per month = 20% benefit reduction

12 months x 5/12 of 1% per month = 5% benefit reduction

48 months total 25% total reduction

So in the end, if you retire 48 months early, you get a 25% benefit reduction. You only receive 75% of what you would have received if you waited until your full retirement age of 66. And that’s locked in forever – it doesn’t go back up to the full 100% once you hit your full retirement age.

However, there is a way out. Say you’re not retiring at age 62 because you want to, but you have to stop working because you’re disabled – you have medical problems that prevent you from doing your job anymore, and would prevent you from doing other jobs, as well. Applying for Social Security disability benefits is one option, but that’s often a long, drawn-out process that takes years to apply, appeal, and finally get those benefits. In the meantime, you’ve got no income.

What you can do in that situation is to apply for both early retirement benefits and disability benefits. You will start receiving the retirement benefits (subject to the reduction formula above) almost immediately, and that will provide you some income while you’re going through the process of proving your disability. And the reduction to your retirement benefits – if you’re eventually approved for disability, the Agency will “undo" your early retirement and re-classify you as disabled instead of retired.

There is an another way filing for disability can protect your eventual retirement benefits, because of the way Social Security calculates those benefits. Retirement benefits are based on your Average Indexed Monthly Earnings, or “AIME." Social Security calculates your average earnings per month over your whole life, and adjusts them for inflation. If you had several years with no earnings, simple math would say that’s going to bring your average monthly income down, and your retirement benefits down with it. If those years with no earnings fall during a period of disability, though, Social Security will not count those years in your average, leaving your average earnings higher, and therefore giving you a higher retirement benefit. So if you’re not working because of a disability, it’s always a good idea to apply for Social Security disability, not just for the benefits it provides now, but also for the benefits it provides when you eventually reach retirement age.

Once you reach your full retirement age, even if you’ve been found disabled, you are converted over to “retirement benefits" by Social Security. No one is considered “disabled" by the Agency after they reach their full retirement age. If you applied for early retirement, but were later found disabled, you may not have any reduction to your retirement benefits because of the early retirement election, but there might still be a small reduction if there were any months where you received “early retirement" benefits that you did not eventually receive disability benefits for, those months would still reduce your retirement benefits.

For example, if someone became disabled right on his 62nd birthday, and started receiving early retirement benefits right then, and applied for disability, he would have about 6 months during which he receives early retirement, but is not eligible for disability benefits. That’s because Social Security disability benefits have a waiting period, but retirement benefits do not. Under that scenario, the claimant would have a 5/9 of 1% reduction to his eventual retirement benefits for each of those 6 months. In other words, when he reaches age 66, his benefit will go down by about 3% because of those early retirement benefits. If his benefit should have been $1,000, it would be reduced about $30.

Most people would say that having money to live on while they’re pursuing Social Security disability benefits is well worth a $30 reduction, four years down the road. But these are the things you need to think about when you’re deciding what to do with retirement and disability benefits. Know your rights, and protect your benefits!

--Jeremy Bordelon