You probably know how important it is that your employees have a plan in case they can’t work for a long period due to an illness or an injury. And you probably also know that the most important part of that plan, is making sure they’ll have enough money to meet their essential expenses. But what you may not have thought about is the impact a disability could have on their retirement savings and how you can help them take steps to keep their planning on track.
How a Disability Affects Their Retirement Plan
If they had a serious illness or injury and had to stop working for an extended period of time, their first order of business—after taking care of their health—would be taking care of expenses like housing, groceries, utilities, transportation, medical costs, etc.
A group long-term disability insurance program can help them with this, as can government programs like Social Security Disability. But if their monthly income from these sources is only covering basic needs, and if they have added expenses like medical bills, it may be hard to continue saving as much for retirement as they were prior to becoming disabled.
If the centerpiece of their retirement savings is a 401(k) plan that they get through your company,they won’t be able to make any more contributions, since they’ll no longer be an employee. Any matching contributions they were getting from your company are off the table, too.
The Effect of Disability On Your Savings
So, just how big a difference does it make to stop saving for retirement? Here’s a hypothetical example:
Edward, at age 35, begins making a $875 monthly contribution to a defined contribution plan, such as a 401(k) plan ($10,500 annually).
Normal Age Retirement
Edward makes 30 annual payments of $10,500. At age 65, his defined contribution plan totals $1,189,474.1
Disabled without Protection
Edward becomes totally and continuously disabled at age 40 without protection. Prior to disability, Edward made five annual payments of $10,500 into his defined contribution plan. No further payments are made after disability strikes. At age 65, his defined contribution plan totals $421,861.2
Using Disability Income Insurance to Help Protect Your Employees’ Retirement Savings
At MassMutual, we have a way to help your employee continue saving for retirement if they become too sick or hurt to work – RetireGuard®. And while it’s not a retirement plan, nor a substitute for one, it can help replace an amount equal to the contributions that would have been made to their retirement plan if they had not become totally disabled.
With RetireGuard, your employees may be able to insure an amount equal to 100% of their present contributions to their defined contribution plan, including the matches that your company makes (maximum benefit amounts are based on current IRS defined contribution maximums). During a period of total disability, eligible benefits will be paid monthly into an irrevocable trust account at The MassMutual Trust Company, FSB. As benefit payments are made to the trust, the employee has the ability to invest these funds into a broad list of publically traded securities, so that they can select the investment strategy that best meets their retirement goals. The trust proceeds are paid out at retirement age according to the terms of the Trust; retirement age is generally tied to the end of the benefit period chosen.3
Disabled with Protection
Edward becomes totally and continuously disabled at age 40. Prior to disability, Edward purchased RetireGuard, and made five annual payments of $10,500 into his defined contribution plan. Beginning 180 days after disability, monthly benefits of $8754 are paid into a MassMutual Trust account. At age 65, the combination of his defined contribution plan and the Trust account totals $972,425.5
Protecting Your Employees’ Retirement Savings
A disability doesn’t have to get in the way of your employees financial security later in life. With good planning, they can make sure that even if they have to stop working for a long time, their retirement savings strategy will stay on track—and they’ll have one less thing to worry about.