Many of us are familiar with the traditional route to retirement. You get a job, open retirement savings accounts and eventually enter your golden years and retire. Then you sit back and enjoy the fruits of your labors. However, not every path is so simple and straightforward. There are alternatives that some of us can’t avoid, like medical retirement. Understanding the differences between medical retirement and regular retirement can be of huge benefit to you. You may also want to consider working with a financial advisor as you plan out your retirement.
What Is “Medical Retirement?”
The premise of medical retirement changes slightly depending on its context. The most common use of it applies to military personnel, though. There, it’s a form of compensation for anyone with a military career ended due to a disability. The medical condition must stop you from performing your military duties. A Physical Evaluation Board (PEB), consisting of active-duty physicians, reviews your case and decides whether you’re fit to serve.
The medical board may only temporarily retire you if the disability is subject to change, putting you on the temporary disability retirement list (TDRL). After that, you’re subject to regular medical reevaluations. Eventually, you’re either permanently medically retired or returned to duty.
But it also exists outside the military. Workers in other areas can also start medical retirement if a disability impedes their ability to work. To qualify, your disability must be long-term and the source of why you cannot work. Typically, a doctor must document and confirm your disability and show how it prevents you from working in your or other fields.
Once that’s done, you can apply for disability retirement. The approval process varies between employers, though. For many it means applying for Social Security Disability. Federal employees can apply through the Civil Service Retirement System (CSRS) or the Federal Employees Retirement Service (FERS). Or, if you’re an employee of the state, you can apply through your state. For example, if you’re a public school teacher in Texas, you apply through the Teacher Retirement System (TRS) of Texas.
Medical Retirement Benefits
Similar to traditional retirement, there are potential benefits available in medical retirement. Here are the options you should look for:
Social Security Disability
There are programs out there that provide money to people with a short-term or partial disability. However, Social Security is not one. Your medical condition must be long-term to qualify for Social Security disability benefits. Additionally, you must have worked in a job covered by Social Security – most Americans between the ages of 21 and 64 do. Essentially, that just means you paid into the Social Security system, either through payroll or self-employment taxes.
Generally, this benefit provides a monthly payment to qualifying individuals. You may start collecting them until you can work again, as “work incentives.” Or, if you receive these benefits at full retirement age, then they convert into retirement benefits (at the same amount). According to the Social Security Administration (SSA), disabled workers and their dependents account for 13.8% of total benefits paid. And, based on 2020 data, monthly benefits average around $1,277.
The benefits split into two forms: Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI). The type you receive depends on the number of work credits you have earned, your income and disability.
Certain limitations and rules apply, however. Check with the SSA’s website to ensure you qualify.
Pension
A medical retirement will not likely affect your pension. However, receiving a pension may alter the amount you receive in monthly disability payments. It depends on the type of pension you have and the disability benefits you receive. Supplemental Security Income has a greater chance of impacting your pension than Social Security Disability Insurance.
Long-term disability benefits (LTD) may take a similar role as a pension plan, since they act as ongoing income. But, your insurance provider may require you to apply for Social Security Disability if you want to collect LTD.
Military Benefits
The Veterans Benefits Administration ensures eligible service members receive benefits. You can open a claim for VA compensation when you participate in the Integrated Disability Evaluation System (IDES). This helps determine your disability benefits. Some may be eligible for vocational rehabilitation and employment (VR&E) services, which help you gain independence and work in your daily life. The VA also provides health care benefits to veterans with conditions related to their military service. It lasts a lifetime for those with disabilities.
Being placed on the Permanent Disability Retired List (PDRL) also entitles you to the full benefits of a military retiree and a monthly retirement check. Severance pay is also available as a one-time lump sum.
What Is “Regular Retirement?”
Regular retirement is just like how it sounds. It’s what waits for many Americans as they grow older. People work their whole lives and save money; then, they leave the workforce once they hit a certain age.
Based on TD Ameritrade’s Road to Retirement survey, most adults want to retire by age 67. But the average life expectancy in the U.S. (80.5 for females and 75.1 for males) means you have to prepare enough savings to carry you through your seventies, at the very least. Benefits can help you cover some daily expenses, making your savings last longer.
Regular Retirement Benefits
Working comes with its rewards. Here are some of the benefits you may qualify for in regular retirement:
Social Security Retirement Benefits
Almost every American includes Social Security as part of their retirement plan, and almost nine out of 10 people over the age of 65 receive Social Security benefits. In addition, many retirees depend on these benefits as a main source of income.
Social Security repays a portion of your pre-retirement income based on your 35 highest-earning years. It varies according to how much you earn and when you start receiving benefits. On average, beneficiaries receive approximately 40% of their pre-retirement income through this. However, you need to wait until your full retirement age before you can receive your full retirement benefit amount.
Military Retirement Benefits
There are several benefits available to you as a military retiree. If you received an injury or experienced an illness related to your service, you may be entitled to VA disability compensation. This is a tax-free, monthly payment to qualifying veterans. There is a VA pension for veterans with a low income and their survivors as well, which are also monthly payments. However, they are based on financial need.
On top of that, service members may choose a retirement plan, such as Final Pay, High-36, REDUX and Blended Retirement System (BRS). You can read the breakdown of each on the Military Compensation site for the U.S. Department of Defense.
Generally, your military retirement benefits do not impact your Social Security benefits. You’ll receive those based on your age and earnings like everyone else.
Pension
Pensions are a form of a retirement plan. Essentially, employers promise to pay their employees a regular and defined benefit after they retire. Typically, they calculate the amount as a percentage of the salary you earned in the position. The exact percentage depends on the terms offered by the employer and how long the employee worked. So, you can’t contribute to it like you would with a 401(k) or other retirement plans.
There are two types of pensions: public and private. Government bodies on a federal, state or local level distribute public pensions to their workers, i.e., firefighters, teachers and police officers. Private pensions likely come from companies, and they generally have more legal protections.
Medical Retirement vs. Regular Retirement: Distributions
Most people build up retirement savings. That way, they can support themselves when they’re out of work. Disabled individuals are no different and often turn to their retirement plans as a way to replace their job’s income.
But taking from your funds too early can be tricky. In regular retirement, if you take a distribution before the age of 59.5, you incur a 10% distribution penalty. You may also face normal income tax on the withdrawal. That’s because the applicable retirement accounts are tax-deferred, so you don’t pay tax when you contribute money.
However, the IRS gives qualifying disabled individuals a break if they touch their retirement savings. They receive an exemption from the 10% penalty. This exception applies to the early distribution tax for 401(k)s and IRAs as well as SARSEP, SEP and Simple IRA plans.
You must also meet the IRS definition for “total and permanent disability.” That means your condition stops you from any substantial work and will either be indefinite in length or fatal. Due to the difference between Social Security and the IRS’s criteria, qualifying for the former does not guarantee the 10% penalty exception.
Bottom Line
In the end, the type of retirement you receive depends on your personal situation. A medical retirement may be unavoidable for some who can no longer work due to disability or illness. In that case, there are benefit opportunities out there, such as for veterans.
The hope is, though, that a healthy and safe life will lead to more traditional forms of retirement. That means you’ll have to work longer, but you also have more opportunities to build your wealth. So if you’re lucky enough to remain healthy through your entire working life, make sure you take advantage of every retirement savings opportunity you come across.
Tips for Retirement Planning
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If you want your savings to grow, investing is an important tool. If you’re unsure where to start, consider speaking with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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You work to build your retirement savings, but taxes can take a chunk out of them. That’s why it’s worth finding out the tax-friendliest places for retirees. You can see our take on it with the best states to retire for taxes.
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