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What Should I Know About Social Security Disability Insurance?

When it comes to shoring up your retirement savings, “work longer” isn’t always the right answer.

Did you know that employees who are 50 and older can defer the maximum $19,000 into a 401(k), plus the catch-up contribution of $6,000 this year?

CNBC’s recent article, “Why working into old age may not salvage your retirement,” says pre-retirees can also increase their retirement income, by staying in the workforce a bit longer. For each year you delay Social Security, up until age 70, you get an 8% increase in your benefit check.

However, not all of us can continue to work. Those who end their careers due to health conditions, will impact their retirement security. People may not know that Social Security offers disability insurance, but going through the process to get those payments is a tedious process. Roughly 75% of Americans aged 65 and over have multiple chronic conditions. This can include diabetes, high blood pressure, and arthritis, says the Centers for Disease Control and Prevention. These maladies can jeopardize seniors’ finances, when they are forced to reduce their hours or stop working altogether.

A recent study from Mathematica’s Center for Studying Disability Policy found that newly disabled workers in their 50s and early 60s have their earnings decrease by an average of 50%, two years after the onset of their condition.

The Mathematica study looked at more than 3,100 people who were born between 1931 and 1947, following them over the course of about 20 years. Approximately 14% of the participants had a work-limiting health condition by age 59. Another 12% of those in the survey reported a condition by age 63, and another 10% said they experienced this by age 67.

The research showed that those who had these health problems, were more likely to stop working early. The study cited participants at age 59 who were about 2½ times more likely to stop working, compared to healthier peers.

Though federal disability and retirement benefits help impacted workers make up for some of their lost earnings, it doesn’t totally replace what those workers were making, the study found.

Social Security’s disability insurance gives sick workers financial support, if they’re no longer able to earn a living. To be eligible, you must have been working for at least 10 years. Younger workers may qualify for benefits with less time.

However, there’s a catch with Social Security disability coverage. and the problem is that qualifying for it is very difficult. You’ll need to go through a five-question process. The agency uses this survey to vet applicants, including determining whether the condition is so severe that it keeps an individual from performing any work. Even if you do qualify for Social Security disability, you won’t receive benefits, until the sixth full month after the date your condition started.

There are moves you can take before a health emergency to protect your income. First, buy disability insurance. This coverage generally replaces up to 60% of your earnings for a specified period. The benefits generally run for three to six months for short-term disability plans, or they can last for as long as five years or up to age 65 for long-term disability coverage. Insurance companies also have supplemental disability insurance to help cover additional income needs that might otherwise not be covered by your standard disability policy.

How your proceeds are taxed depends on who’s paying the premiums. If your employer pays, the benefits will be taxable. Employees who pay for coverage using after-tax dollars will get their benefits tax-free. However, if they pay the premiums with pre-tax money, their benefits are taxable.

Reference: CNBC (May 5, 2019) “Why working into old age may not salvage your retirement”

Suggested Key Terms: Elder Law Attorney, Long-Term Care Planning, Retirement Planning, Disability, Social Security Disability Insurance, Elder Care

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