MILWAUKEE (BUSINESS WIRE), May 24, 2010 - Individuals who become disabled may lose their ability to earn an income in the short-term, and may incur a significant negative impact on the value of their retirement nest egg.
New analysis from Northwestern Mutual quantifies this impact. The analysis shows there is a significant difference between retirement programs for investors with individual disability income insurance (DI) and for those without, in the event that both investors experience a comparable disability.
According to the analysis outlined in “Will Your Retirement Program Work As Intended?” a two-year disability at the age of 50 can reduce total investment accumulation by 30 percent at the retirement age of 65. In this scenario, that equates to a loss of approximately $1 million in value. For an investor with similar income and investment assumptions who chooses to purchase an individual DI policy, the investment portfolio is reduced by only about $230,000, or eight percent.1
“As we can see from this scenario, even a near-perfect investment approach can be thrown completely off-track by a disability event,” said Stephen Frankl with Northwestern Mutual’s Disability Insurance Division. “That is why DI is such a critical tool in your financial toolbox. Retirement planning and disability income planning are interdependent, and together each process helps replace a portion of lost income, meet monthly living expenses and achieve a certain retirement lifestyle.”
The purpose and value of disability insurance is well understood, yet very few Americans protect their income by insuring it against disability. In December 2009, a Northwestern Mutual study revealed that 80 percent of Americans recognize the devastating impact a disability would have if it prevented them from earning a regular income. At the same time, only 10 percent of adults over the age of 21 said they have purchased a DI policy.
“Disability insurance protects an individual’s most valuable asset – the ability to earn an income,” said Frankl. “It’s important for individuals to understand that they are not immune from the risk of disability, but they do have the power to soften the impact it would have.”
According to the Social Security Administration, three in 10 workers entering the work force today will become disabled before retiring.2 To help individuals assess their likelihood of a disability, Northwestern Mutual’s website includes several helpful calculators, including “What Are the Odds” and the “Disability Insurance Needs Calculator.”
About Northwestern Mutual
The Northwestern Mutual Life Insurance Company – Milwaukee, WI (Northwestern Mutual) has helped clients achieve financial security for more than 150 years. As a mutual company with $1.2 trillion of life insurance protection in force, Northwestern Mutual seeks to share its gains with policyowners and deliver consistent and dependable value to clients over time. Northwestern Mutual and its subsidiaries offer a holistic approach to financial security solutions including: life insurance, long-term care insurance, disability insurance, annuities, investment products, and advisory products and services. Subsidiaries include Northwestern Mutual Investment Services, LLC, broker-dealer, registered investment adviser, member FINRA and SIPC; the Northwestern Mutual Wealth Management Company, limited purpose federal savings bank; and Northwestern Long Term Care Insurance Company; and Russell Investments.
1 The hypothetical scenario used in “Will Your Retirement Program Work As Intended?” involves two investors starting at age 40. Both earn $250,000 annually with 3% annual income increases while working, and both have an existing investment portfolio valued at $250,000 with a 6% after-tax rate of return. One investor contributes 10% of income annually to the investment portfolio and purchases no disability income insurance. The other investor contributes 10% of income annually to the investment portfolio, minus an amount used to purchase individual disability income insurance.
2 Social Security Administration, Fact Sheet, January 31, 2007
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