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The Impact of a 2-Year Disability on Your Income and Retirement

Insights & Ideas Team •  May 16, 2016 | Your Finances, Enjoying Retirement

It may sound unbelievable, but statistics show that one in four of us will have a disability during our working years that will leave us temporarily unable to work.1 Clearly this scenario is far more common than you might think; it could be caused by an injury from an accident or an illness like cancer or an ongoing chronic condition like back pain.

Most disabilities are temporary, and 60 percent of disability income (DI) insurance claims resolve within two years, according to Northwestern Mutual’s disability claim experience. But what happens if you become disabled and are unable to work during your key earning and saving years?  It could impact your retirement savings and put your retirement plans in jeopardy. “Your income is the heart of your retirement plan,” says Northwestern Mutual Vice President of Disability Income Insurance Steve Stribling. “You’ve got to protect your greatest asset, your ability to earn an income.”

Consider this scenario. Lisa and Brian, both age 40, earn $250,000 a year with 3 percent pay increases; and both have retirement accounts worth $250,000 that are earning a 6 percent after-tax rate of return. Both set aside 10 percent of their income for retirement savings. Brian decides to use part of the money earmarked for savings to purchase DI insurance. Lisa decides against purchasing a policy.

Fast-forward 10 years and they are both 50 years old. Lisa has saved more than $842,000 in her retirement account. Because Brian has been paying for DI insurance, he has saved a little less. He now has nearly $800,000. That year, both Lisa and Brian get cancer and are unable to work.

The good news is that both Lisa and Brian will recover. But the financial impact of their disability will have a very different effect on each.

When Brian became disabled, his DI insurance started paying him a monthly benefit that supplemented a portion of his normal income. He had to make some difficult financial choices and temporarily stop saving for retirement. However, the money he saved continued to earn interest; and when he was ready to start working again two years later, his retirement account was worth nearly $890,000. By the time he reaches retirement at age 65, his account will be worth nearly $2.8 million.

When Lisa became disabled, she was forced to withdraw money from her retirement account to pay her living expenses2. By the time she returned to work two years later, her account had declined in value to slightly more than $550,000. When she retires at age 65, she will have a little more than $2.1 million, $700,000 less than Brian.

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The difference between Brian and Lisa is a stark example of why a solid financial plan should focus on more than just accumulating wealth; it should help you both protect and grow what you have. “Disability income insurance helps protect the asset that protects the other assets. It’s important to consider ways to protect your plan from something like a disability,” Stribling said. A financial professional can help you understand how to build a financial plan that both protects and grows your wealth for the future.

1“1 in 4 of today’s 20-yr-olds will become disabled before they retire.” Social Security administration Fact Sheet, Feb 2013

2Living expenses are assumed to be equivalent to the amount of Brian’s disability income benefit.

Disability insurance policies are subject to full underwriting, which could affect the amount of coverage available as well as the actual premium charged. They also contain exclusions and limitations that could affect individual coverage. Eligibility for additional policy benefits and qualification for benefits is determined on a case-by-case basis.

Investment information is hypothetical and not representative of any specific investment, nor is it a guarantee or projection of investment performance.

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