Early Retirement Due to Disability or Illness: Claim Benefits or Wait?

Ideally, we work as long as possible to save for retirement and postpone claiming Social Security benefits (which helps to increase benefits).¹ But sometimes, forces outside of our control — like health or life events — call for earlier retirement.

If you find yourself needing early retirement due to disability or illness, you’ll have to decide whether you should claim your Social Security benefits at the age of 62 (the earliest age at which most of us can collect) or wait until after your full retirement age (FRA) to file your claim.²

The Impact of Taking Social Security Early.

When you choose to claim your benefits will impact the amount of Social Security benefits you’ll receive:

• You’ll get full Social Security benefits if you retire at FRA (between the ages of 65 and 67, depending on the year you were born).²
• If you retire before your FRA, benefits are reduced. For example, if your FRA is 67 and you retire at 62, your Social Security income could be as much as 30% lower than if you had been able to wait.³
• If you retire after your FRA, benefits are increased up to age 70.⁴

Because you could see a substantial reduction in Social Security benefits if you claim early, it might make sense to wait to take your benefits. But that might not be an option for everyone.

Applying for Social Security Disability Insurance Benefits.

If you must leave the workforce due to health issues before your FRA, claiming Social Security disability insurance (SSDI) benefits may be a better option than claiming your retirement benefits. It’s important to note that if your disability improves and you’re deemed able to return to work, you will no longer qualify for SSDI.⁵

Benefits of SSDI:

• You’ll receive monthly income from the Social Security Administration, but it won’t reduce your Social Security retirement benefits.
• A disability freeze goes into effect. (Any year your income was low due to disability won’t count against the average monthly wages used to calculate Social Security benefits.)⁶
• You become eligible for Medicare after 24 months of SSDI coverage. This also applies if you’ve been diagnosed with end-stage renal disease.⁷

How long does it take to get approved for SSDI?

• The SSDI application process can take several months.
• You must have a condition included on the Social Security Listing of Impairments, also known as the Blue Book.
• This condition must have lasted 12 months, be expected to last 12 months, or be expected to result in your death.
• You also must have worked long enough to earn sufficient work credits to qualify for SSDI.⁸

Covering healthcare costs for early retirement.

A recent TD Ameritrade study found that pre-retirees 45 and older cited healthcare costs as the number one barrier to retiring early.⁹ So what do you do if health issues force you into early retirement?

Early retirees can:

• Remain on an employer plan for up to 18 months under COBRA insurance.
• Get covered by a spouse’s workplace plan.
• Buy individual health insurance coverage.
• Be eligible for Medicare insurance before age 65 with SSDI.¹⁰

Aside from the costs and complexities of health insurance coverage, potential early retirees — especially those who planned to work until FRA — might not have built a sufficient nest egg for out-of-pocket healthcare expenses. It might be difficult but try to keep dedicated savings for healthcare expenditures. Many retirement accounts typically don’t allow withdrawals before age 59½ without penalties.¹¹ If you have a qualifying high-deductible health plan, you might consider a health savings account (HSA). Otherwise, you could put money into a general savings account to cover your premiums before you become eligible for Medicare.

Financing healthcare costs over time is also an option, especially if you have substantial expenses because of a particular injury or illness. Some providers allow payment plans, while others accept the CareCredit credit card.*

If you are looking for an option to help manage your medical bills, consider financing through the CareCredit credit card. The CareCredit card is an easy way to pay for health and wellness care, and it offers promotional financing options.* To apply, go to carecredit.com/apply.