There is good news and bad news on the retirement planning horizon. On the positive front, people are beginning to think about retirement planning at earlier stages of their careers. According to a recent study, U.S. workers are now first considering their retirement needs while still in their 30s.
Partly a result of lowered confidence in the future of governmental programs and reduced availability of traditional defined-benefit pension plans, this increased sense of personal responsibility for retirement is further heightened by the range of benefit choices and education resulting from more frequent job changes.
The troubling news is that there continues to be one big risk to retirement-planning success that leaves workers vulnerable. With the new paradigm of growing personal responsibility for retirement, employee earnings – contributed to either qualified or non-qualified plans – has become the primary retirement funding source, even if there are levels of employer matching involved. And that income all too often remains at risk to a long-term disability.
There is a perfect storm building around this risk factor. U.S. savings rates, already low in recent years, turned negative in 2005, leaving little financial cushion to cover work interruptions. The chances of being out of work more than three months before age 65 are approximately one in two, depending on the worker’s age, contradicting the common view that disability “will never happen to me.” As the population ages, these statistics become even more compelling. While the incidence of catastrophic, life-long disabilities are not as common as transitional conditions, even a temporary disability and its associated costs can put a serious dent in an otherwise sound retirement plan.
In addition, many individuals erroneously think they are already adequately protected for this risk, confusing disability coverage with other benefits provided by the government or their employers. Add to the mix the fact that Americans are living longer, with the Harvard Medical School recently pegging the average life expectancy in the U.S. at 77.6 years, and maintaining adequate retirement funding over the entire course of a career becomes more important than ever before.