How Social Security Disability is Calculated - YouTube

Hey everyone!

In today’s video I’m going to tell you how a Social Security disability benefit is

calculated.

When we're finished here, you won’t have to just take the word of the Social Security

Administration, you’ll know how to do the calculation for yourself so you can double

check their numbers and be certain that your estimate is correct.

And this video isn’t just for those who are disabled either.

I think that anyone’s plan for retirement should always include a piece for the unexpected

“what ifs” of life.

So this video is really for anyone who is planning for retirement and wants to understand

how a disability benefit is calculated so you can plan your future, whatever it may

hold.

But real quick before we get to all of that, if you are new here and haven’t subscribed

yet, just go ahead and hit that subscribe and that notifications bell now.

I’ve said this a few times already, but I strongly believe that the next few years

are going to hold more changes for Social Security than the program has seen since it

was first created.

As those changes start to work through the system, I’ll be right here helping you break

them down so you can get every dime in benefits that you deserve.

So if you’re ever faced with a career-ending disability, whether it was a disability that

built up over time and progressively got worse, or a disability that had a sudden onset, you

may need to consider filing for disability benefits.

This probably wasn’t part of the plan you laid out in your mind.

It rarely is the most desired outcome, at least for the individuals that I’ve worked

with.

But disabilities do happen and as we age, the likelihood of a disability increases.

So understanding how your eventual social security benefit may change if you begin receiving

a disability benefit instead of a retirement benefit is critical to a well-thought-out

retirement plan.

These two benefits amounts are often different.

And if you want an estimate for either disability or retirement benefits you can’t just use

the official SSA benefits estimate alone because there are projections built in to that estimate

about future earnings.

If the ability to earn those future earnings go away due to a disability, you need to know

how that could change things and what you may be able to expect in monthly payments.

To understand what you should project for a disability benefit requires at least a basic

understanding of the calculation method used to project your retirement benefit.

The calculation process is very similar, but there are some differences that matter.

First, let’s hit the high points of the process used to calculate retirement benefits.

And I don’t want to cover a lot of detail here, but I do have a video that covers this

step by step and if you haven’t watched it yet, I’d highly recommend you check that

out.

I’ll link it up in the description.

The important points to know for a retirement benefit is that the Social Security Administration

calculates your retirement benefit by inflating all of your historical earnings through age

59 to have them expressed in today's dollars.

They also use the earnings at 60 and beyond but don’t add any inflation.

After the’ve inflated your historical earnings, they take out the highest 35 years.

They call these your “computation years” which for retirement benefits is ALWAYS your

highest 35 years.

If you don’t have 35 years of earnings, they’ll use the number of years you do have

and then use how many ever years of zeros it takes to get the total up to 35.

They then add up the inflated earnings from those 35 years and divide the sum by the number

of months in 35 years which is 420.

What this does is takes your historical earnings, puts them in today’s dollars and determines

the average amount of earnings you made on a MONTHLY basis.

They refer to this as your average indexed monthly earnings, or AIME.

Once your average monthly earnings are determined, the calculation applies that average to the

Social Security benefits formula that is in place the YEAR YOU ATTAIN AGE 62.

Now I don’t want to get into the fine details of the actual formula, again just watch my

video How Social Security Retirement Benefits Are Calculated in 3 Easy Steps where I cover

the formula in detail.

Once your benefit goes through this formula, the result is your full retirement age benefit

amount.

And then the last step in the retirement benefit calculation process is reducing this benefit

if you file early, or increasing this if you file after your full retirement age.

So those are the steps in calculating a retirement benefit.

You may be looking at this and have already spotted a few issues with how this process

may not be a fair method of calculating a disability benefit.

If you’re like a lot of my viewers, you may already be wondering, does the calculation

process for disability benefits penalize individuals who never had the opportunity to work for

35 years?

What if you become disabled before you turn 62..What formula is used if you’re younger?

And then...are disability benefits reduced because you have to file for them before your

designated full retirement age?

Thankfully, the Social Security Administration recognizes this and does not use this exact

same calculation to determine the amount of disability benefits you can receive.

When calculating disability benefits, the Social Security Administration first determines

how many years should be used in your calculation.

Unlike the retirement benefits calculation, where they ALWAYS use 35 years, they DON’T

always use 35 computation years to determine your historical earnings.

If they did, this would penalize workers who became disabled before they were able to work

for 35 years.

Instead, they take the number of years from the calendar year you turn 22 through the

year you become disabled.

Then they subtract one year for every five years of work.

This is known as the “one-for-five” rule.

Now I know that was a lot, so let me give you a few examples that will simplify this.

Let’s say you have five years of earnings after age 21 but become disabled at age 26,

well that’s five years of work so you’d subtract one year which means that your disability

benefit calculation would use a total of 4 computation years.

Or if you have 10 years of earnings after age 21 before becoming disabled at 31, that’s

10 years of work so you’d be eligible to subtract two of the lowest earning years and

thus have eight computation years to use in the calculation.

Now one important note here...in no case can the number of years used in the calculation

exceed 35.

Also..., there are some childcare dropout rules that allow you to drop out some of the

years you were taking care of a child.

The eligibility for the childcare dropout years is very specific and probably best reserved

for a conversation between you and your social security disability attorney.

Once the Social Security Administration determines the number of years to use in your calculation,

the formula does look a lot like the formula for retirement benefits.

The SSA takes the highest earnings from all your work history and indexes them for the

wage inflation that occurred during your working years.

Once they have your earnings indexed, they take the highest of your specific computation

years to use in the formula.

For example, if you became disabled at 43 years old, you’d have a total of 22 years

to use.

Using the “one for five” rule, 4 years would be dropped.

They would take the 18 highest indexed earnings years to use in the calculation.

Then they would then sum them up and simply divide by the number of months in those years.

For example, for an individual who had 18 years of indexed earnings, they would divide

by 216.

The result would be the average indexed monthly earnings (AIME).

Once your AIME is determined, that figure is calculated through the benefits formula

in place THE YEAR YOU BECOME DISABLED to determine your disability benefits.

This is the other key difference between the retirement benefits and the disability benefits

calculation.

So lets see if we can summarize all of these differences onto one page.

Retirement benefits will always use 35 years of earnings.

Disability benefits will use the number of years from the year you turn 22 through the

year you become disabled.

Then they subtract one year for every five years of work.

Retirement benefits will be calculated with the formula in place the year you attain age

62.

Disability benefits will be calculated with the formula in place the year you become disabled.

Retirement benefits are reduced or increased based on filing age.

Disability benefits are NOT reduced or increased due to filing age.

The result of the disability benefits formula is what you’ll receive in monthly benefits.

This is how Social Security disability benefits are calculated… but there are some really

strict eligibility requirements to receive these benefits.

I’d strongly encourage you to use the guidance of an attorney who specializes in this area.

There is one on Youtube that I like a lot.

His name is Jonathan Ginsberg and his entire channel is devoted to Social Security disability.

I’ll put a link in the description where you can find him and subscribe to his channel.

So I hope this video helps bring some clarity in the differences between how the two different

benefits are calculated.

There’s just one last thing...If you want to understand more about Social Security,

you should get your free copy of my cheat sheet.

This is where I’ve taken the most important rules and numbers from the Social Security

website and condensed it down to just one page.

There’s a link in the description where you can get yours.

But if you’re ready to move beyond a one sheeter and want a more thorough explanation

of the Basics, you should check out my course.

Whether You're...a soon-to-be retiree who wants to make sure they receive all the benefits

that they have earned or a detail-oriented planner who knows wants to double check their

knowledge about how Social Security works or maybe a divorced spouse who want to know

what benefits you can expect, this course will give you the answers you've been looking

for and the support you need on your journey to an awesome retirement.

Theres a link in the description where you can read more and get instant access.

Thanks for watching!

My course https://www.devincarroll.com/enroll

My Video: You Can’t Trust Your Social Security Statement https://youtu.be/1N3yAU4JaRs

My Video: How Social Security Retirement Benefits Are Calculated [3 Easy Steps]

https://youtu.be/Gt2lA8515_A

SSA Page on SSDI dropout years https://secure.ssa.gov/poms.nsf/lnx/0300605230

Jonathan Ginsberg: Social Security Disability Videos https://www.youtube.com/user/ginsbergssd