According to Fidelity, by retirement age, savings and retirement accounts should be 10 to 12 times the annual salary at retirement. Having a yardstick to evaluate progress is helpful and can be reassuring for the serious saver. Sometimes, though, life interferes with the best laid plans.
Data tells us that 25 percent of workers entering the workforce today, will suffer an income interrupting disability, which is certainly a reasonable motivation to purchase individual disability insurance.
When clients are in their 50s, many times their children are out of school and their mortgage may be paid off. They may also be earning the highest incomes of their careers. This is the time to concentrate on building retirement accounts and maximizing retirement contributions. Industry data reveals that this is the same age group (people 50 – 59 years old) with the largest percentage of initiated disability claims. There goes the retirement catch-up plan!
Impact of disability on retirement plan
Disability can wreak havoc on a retirement plan. Let’s look at two identical situations except for one difference; disability retirement insurance. Bill and Will are both 40 and very committed to accumulating retirement savings equal to 10 times salary of $150,000 at retirement age; roughly $1.5 million. At age 50, both have accumulated $500,000 in 401(k) and personal savings. They are well on their way to achieving their goals. At age 53, both Bill and Will suffer illnesses that prevent them from collecting a paycheck for two years.
This is a very real situation. In fact, according to the Society of Actuaries, for disabilities longer than 90 days, the average claim period is 6.3 years. Fortunately, in our example, both have individual disability insurance that provided a steady income while recovering from their illness. And both returned to work by age 55 and resumed saving for retirement. Only Bill had the additional coverage provided by disability retirement security insurance.
Look at the difference in the retirement account balances when Bill and Will returned to work.
| Bill | Will | |
| Retirement account balance before disability | $500,000 | $500,000 |
| Retirement account balance at end of disability | $630,450 | $578,812 |
Will’s investments earned 5 percent, $78,812 in total, while he was disabled. During that time, Will was not able to contribute to his 401(k). Bill’s investments also earned 5 percent during that time. But because Bill had disability retirement security insurance, his account also grew by the amount he would have contributed had he been working. In just two short years, Bill’s accounts significantly outpaced Will’s. It is estimated that losing just two years of contributions can reduce the life of an investment portfolio by 5 to 11 years.
Disability retirement security insurance provides a benefit that, in the event of a qualifying disability, contributes to a trust account, an amount equivalent to the annual contributions the insured would have made if working. And for a very affordable monthly premium. The financial advisor can position it as a companion product to the multi-life disability insurance plan. Premiums are usually employee paid so there is no added expense to the employer.
Explore more about disability insurance retirement security. Download Sales Strategy Quick Tip #2 and Our Retirement Security – 401(k) Case Study for more information. Then call your DIS representative for quotes and other sales ideas.
