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.
Still, fewer employees have long-term disability coverage than have medical, dental or life insurance from their employers, and the penetration rates of supplemental individual disability plans are even lower. It’s affordable coverage, contrary to common misperception, and while there are fewer carriers offering individual policies than there once were, products are still readily available to a wide range of income and occupational groups.
So why does this risk to successful retirement planning remain so prevalent? From an advisor’s perspective, individual disability coverage is often viewed as an ancillary sale, compounded by a fear of lengthy underwriting processes and product complexity. In reality, the gradual convergence of group and individual product designs has played a significant role in simplifying individual products and making group plans more comprehensive while easing the sales process for both.
There is a compelling need for clients to be more aware of the risk they are running if they remain less than fully protected against disabilities during their working years. The primary funding stream for retirement planning is at risk, and it is important for us to take a leadership role in closing this critical gap at every stage of a client’s career.
Larry Barton Ph.D. is the president and CEO of The American College. The College has chosen disability insurance as the theme for its annual National Financial Awareness Day initiative on March 6, 2007. If you are a graduate of The American College and you would like to participate in this event, please contact Eric B. Gordon, director of public relations at Eric.Gordon@TheAmericanCollege.edu