Disability Insurance for your Retirement Plan

social security puntContrast all the noise about your 401k with the deafening silence of financial pundits discussing how to protect your retirement plan with disability insurance.  No one can deny that we place a tremendous focus on the accumulation of retirement savings in our country.

I think we've pretty much all accepted the fact that we have to take this on as a personal responsibility and that this afternoon's Barnum & Bailey three ring circus on Capitol Hill cannot be counted on to help us out in retirement. (excuse the run-on)

Or is that just me?

Americans actually save more for retirement

As a matter of fact, some recent numbers that have been released show that American workers are saving something close to $700 per month towards their eventual retirement.

For some perspective on how that stacks up against some other countries–that number is almost double the amount put aside by the same types or workers in France, Germany, and Italy.  Of course, it's exponentially more than workers in some of the other European countries (Greece, Spain etc) which is no big surprise with all of the financial turmoil those countries are having of late.

We all have to face the facts.

Social Security is at best a political football at this point.  No one who I talk to under the age of 50 even uses their Social Security retirement income as part of their planning for retirement calculation.

Majority of the under 50 crowd has already punted

Most think that they may receive something, but whatever they get will just be supplemental gravy, not a primary source of retirement income for them.  All this being said, my point is that most of us see our own saving for retirement as being a crucial component of our overall financial planning and probably more important than ever before.

Even with all of the focus we put on saving for retirement and the burning spotlight that the financial press shines on the issue, most people have never really considered how suffering a disability would affect your retirement planning?  If we think rationally about what comprises a thriving retirement plan, there are only two key components:

  1. A positive compound annual growth rate (CAGR for all you nerds)
  2. Consistently making contributions and/or taking advantage of employer matching contributions

The Real Story of your Retirement Plan

Often times when I've reviewed retirement plans for people, I've found that a vast majority of what they've accumulated is a mix of what they actually contributed and their employer's matching contribution.  The actual CAGR for most people's defined contribution plans is horrid.

That being said, a disability obviously doesn't have any affect on what money you may already have invested but it will most definitely stop your contributions.

Not to worry.  I have some good news.

There is a disability insurance solution

There is actually a pretty simple way to guarantee that a disability won't completely throw your retirement train off the tracks.

The product is actually a type of disability insurance policy that includes retirement protection up to a set dollar amount every month that can be contributed on your behalf if you should become disabled.

Let's look at a couple of scenarios to see an example of what a retirement protected with this type of policy would look like versus one that is not protected.

disability insurance for your retirement plan

*contributions to age 65 assuming an average annual rate of 8%

 

Now let's look at what happens when the same person had only made twelve monthly contributions of $1,500 before they became totally disabled at the the age of 36.

disability insurance

What's also interesting that you can't see is that a two-year disability would mean $334,896 less in the plan at 65 and a five-year disability would result in a gap of $746,999

 

Also, another nifty feature is that the policy will pay your actual contribution and will cover the employer matching contributions as well.

How does it work?

The policy would pay the benefit into an irrevocable trust that is set up for you.  The trustee will then invest the money (with input from you) on your behalf until you reach the age of 65.  After you’ve turned 65, the trustee will distribute the assets to you in a manner that will supplement what you are received from your original retirement plan.

Keep in mind that this does not take the place of your private disability insurance, it merely adds another layer of protection to your plan.  There are other particulars about these specific disability insurance plans that we’d be more than happy to help you sort out.


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