As much as you plan for life after employment, not everyone gets to choose when to retire. Unexpected changes can force you to stop working sooner than expected. That is why it makes sense to prepare for the possibility of early retirement due to disability.
Thinking about the unexpected is not always easy. Still, planning ahead can make a difference if a health issue affects your ability to work.
Why Planning for Potential Disabilities Is Important
According to the Social Security Administration, a 20-year-old worker has a 25% chance of becoming disabled before reaching full retirement age.1
During the pandemic, retirement rates increased. A 2021 Economic Synopses essay reported that the number of retirees, based on data from the Current Population Survey (CPS), rose sharply during the pandemic. It estimated that more than 2.4 million people had retired beyond what pre-pandemic trends had projected.2
The Disability Benefits Center reports that people are twice as likely to receive Social Security Disability Insurance at age 50 as at age 40. They are twice as likely at age 60 as at age 50.3
Life can change quickly. Preparing for possible setbacks can help you stay on track with your long-term goals.
How Can Disability Impact Your Finances?
A serious health event can affect your income and expenses at the same time. If you are unable to work, your earnings may drop or stop. At the same time, your costs may increase.
Disability can affect:
- Your paycheck
- Your total household income
- Your ability to pay for housing, food, and utilities
- Your retirement savings contributions
You may also face new expenses, such as medical bills, personal care services, home modifications, transportation changes, and special dietary needs.
For example, you may need grocery or pharmacy delivery if you cannot shop in person. You might need a vehicle that fits a wheelchair. Accessible housing can also cost more than standard housing.
In addition, if you stop contributing to retirement accounts, your savings will have less time to grow.
Understanding Social Security Disability Benefits
Government disability benefits may replace part of your lost income. Social Security offers benefits to people whose medical condition prevents them from working for at least one year or is expected to result in death. For this, there are two programs: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).
| Program | Who It Is For | Key Requirement |
|---|---|---|
| Social Security Disability Insurance (SSDI) | Workers who earned enough work credits | Must meet work credit and medical rules |
| Supplemental Security Income (SSI) | People with limited income and resources | Must meet income and medical rules |
Both programs follow the same medical standards. If you qualify, the benefit amount is similar to the Social Security retirement benefit you would receive at full retirement age. When you reach full retirement age, your disability benefits convert to retirement benefits. Full retirement age is the age when you qualify for 100% of your Social Security benefit based on lifetime earnings.
If you want more information about Social Security disability benefits, you can visit the Social Security website.4
Family Benefits
In addition to providing your disability and retirement income, Social Security disability may pay benefits to some of your family members based on your work. Eligible family members include:
- A spouse age 62 or older
- A spouse of any age caring for your child under 16 or a disabled child
- An unmarried child under age 18
- An unmarried child under 19 who is still in high school
After receiving disability benefits for two years, you automatically qualify for Medicare. This applies even if you are under age 65. A financial professional can help you understand how disability benefits fit into your overall retirement strategy.
Additional Options
You may be able to deduct certain medical expenses on your tax return. Out-of-pocket medical costs that exceed 10% of your adjusted gross income may qualify for a deduction. This threshold is high, but it can provide relief if medical bills are significant.
Depending on your state, Medicaid may also offer support services. These services can include personal care assistance that allows you to remain at home rather than move to a facility.
Private Disability Income Insurance
Before becoming eligible for Social Security disability benefits, you may receive income from a private disability income insurance plan. These plans are often provided or facilitated by employers, but they can also be purchased individually. You may consider researching your options for a private plan.
401(k) Withdrawals and Disability
If you have a 401(k) retirement savings account, you ordinarily can't make any withdrawals without paying a 10% penalty before owning the account for five years and reaching the age of 59½. However, if you have documentation from a medical professional proving that your condition meets the IRS definition of totally disabled, you can withdraw earlier without facing a penalty.5
Taxes may still apply to the distribution.
The Bottom Line
When deciding how much to contribute to your 401(k), it may help to consider the possibility of early retirement due to disability. Increasing contributions while you are working can build a stronger foundation. You may also want to review options such as government benefit programs, critical illness insurance, and disability income insurance.
Comparing your choices with a knowledgeable professional can help you choose an approach that fits your situation.
Plan ahead to include disability benefits in your retirement strategy. Start Your Free Plan
Sources
- Disability Benefits. https://www.ssa.gov/pubs/EN-05-10029.pdf.
- U.S. Retirement Normalization following the COVID-19 Pandemic. https://www.stlouisfed.org/on-the-economy/2025/jul/us-retirement-normalization-covid19-pandemic.
- SSDI Approval Rate by Age. https://www.disabilitybenefitscenter.org/faq/approval-rate-old-age.
- Disability. https://www.ssa.gov/disability.
- About Publication 524, Credit for the Elderly or the Disabled. https://www.irs.gov/forms-pubs/about-publication-524.
