Monday, July 31, 2006

401(k) Insurance

Many of us have some sort of disability plan, whether on our own or through our employers (although there are a lot of folks who don’t, but that’s another post). Such plans are valuable: during our working years, we’re more likely to become disabled for a while than to die.

Disability insurance can (help us to) pay our mortgage and utility bills, car payments and the kids’ college tuition. There are even tax benefits, depending on how one structures the plan.

One thing this remarkable product can’t do, though, is help us save for retirement.


Well, let’s think about it, shall we? If I’m contributing to my 401(k) (or other qualified plan), I’m doing so with my earned income. 

But what if, because I’m disabled, I’m not earning any income? Even if I could afford to do so (and how many disabled folks are?), I’m not allowed to contribute to my plan until and unless I’m back to work.

But time marches on, and with it, the opportunity to sock away dollars for my retirement.

What to do?

Generally, we don’t endorse or promote specific companies or products here: we’re idea- and solution-oriented. But recently, I learned that one of my carriers has developed a remarkable, and unique, new product that goes a long way toward solving the problem of retirement vs disability.

Called RetireGuard, it’s offered by MassMutual (of course, if and/or when I learn of other, similar products, I’ll update this post). Briefly, it’s a disability plan that serves one purpose: to help fund retirement if one becomes disabled. For example, let’s take that ubiquitous 35 year old. Annie began contributing $400 from each (biweekly) paycheck. She did so in order to maximize her employer’s matching program, and because she feels it’s important. Currently, she’s earning 8 percent on her investment choices.

Should nothing untoward happen to Annie, she can expect to build up about $1.18 million when she hits that “magic 65.”

But what happens when she’s hit by a drunk driver, or has a stroke, or suffers a skiing accident?

If she’s like most of us, she has no way of continuing those contributions, so she ends up with a little over $400,000 on her 65th birthday. Not exactly a pauper, granted, but not “sitting pretty,” either.

With this new insurance plan, however, she’d have $1.15 million for her retirement (about 97% of what she’d anticipated). Good deal. (Caveat: we’re plugging in arbitrary returns here, YMMV).

Now, is this the perfect solution? Well, no: nothing is “perfect.” It may be that her anticipated premiums don’t fit her budget. Or, that she has other investments that would take up the slack. But for a lot of folks, this might be a great way to ensure that our retirement plans aren't totally derailed.
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