You probably know how important it is to have a plan in case you 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 you’ll have enough money to meet your essential expenses. But what you may not have thought about is the impact a disability could have on your retirement savings and how you can ensure your planning stays on track.
How a Disability Affects Your Retirement Plan
If you had a serious illness or injury and had to stop working for an extended period of time, your first order of business — after taking care of your health — would be taking care of expenses like housing, groceries, utilities, transportation and medical costs.
Long-term disability insurance can help with this, as can government programs like Social Security Disability. But if your monthly income from these sources is only covering basic needs, and if you have added expenses like medical bills, it may be hard to set aside the same amount of money you were saving before for retirement.
If the centerpiece of your retirement savings is a 401(k) plan that you get through work, you won’t be able to make any more contributions, since you’ll no longer be an employee. Any matching contributions you 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 $1,189,4741.
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 $421,8612.
Using Disability Income Insurance to Help Protect Your Retirement Savings
At MassMutual, we have a way to help you continue saving for retirement if you 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 your retirement plan if you had not become totally disabled.
With RetireGuard, you may be able to insure up to 100 percent of your present contributions to your defined contribution plan, including employer matches (maximum benefit amounts are based on current on 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, you have the ability to invest these funds into a broad list of publicly traded securities, so that you can select the investment strategy that best meets your 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 chosen3.
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 $972,4255.
Protecting Your Retirement Savings
A disability doesn't have to get in the way of your financial security later in life. With good planning, you can make sure that even if you have to stop working for a long time, your retirement savings strategy will stay on track — and you’ll have one less thing to worry about.