The Future is Now: How Today’s Disability can Affect Tomorrow’s Retirement Plans

Editor’s Note:

It was a beautiful day outside. A perfect day to take a bike ride. Or maybe play a round of golf. But for Dave, it was a day to take it easy on the couch. He just had back surgery and had a few months of recovery ahead of him.

A real possibility

Accidents and illnesses can happen to anyone. Many of us tend to think it’s unlikely that we’ll ever have to deal with a significant event that could cause us to miss a substantial amount of work. But it’s a very real possibility. In fact, one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach their normal retirement age.[1]

While he was recovering, Dave had more than his physical health in mind. He was also concerned about financial matters – namely, medical bills and his loss of income while he missed work.

A real financial concern

Of course, the first thing on your mind when you’re recovering from an illness or disability is your health. But many are thinking of the financial impact as well. After all, three out of ten American adults say they can’t pay an unexpected $400 bill without borrowing money or charging it to their credit card.[2] And only 40 percent of U.S. households have enough available savings to cover at least three months of their recurring expenses.[3]

One thing Dave wasn’t thinking about was how these months of being out of work would affect his future financial plans. Since he wasn’t earning money, he wasn’t adding money to his 401k. In fact, he was seriously considering taking a withdrawal from his retirement funds to pay his medical and household bills.

An injury or illness that keeps you away from work for a substantial amount of time doesn’t just affect your current income and bills – it could also put your retirement savings at risk. Unfortunately, many employees view retirement savings as a safety valve when they don’t have enough money set aside for emergencies such as a period of disability or illness. To help make ends meet, nearly half (49%) of employees surveyed said they would be very likely to take an early withdrawal from their retirement funds, according to the 2021 PwC Employee Financial Wellness Survey.[4]

And a disability doesn’t have to last that long to significantly affect retirement savings. In Lincoln’s most recent research on this topic, the percentage of employees contributing to retirement plans dropped from 76 percent before a short-term disability leave to 66 percent after the leave – a 13 percent decrease – despite the fact that most of these leaves were less than six weeks.[5]

The money you take out of your 401k – as well as the money you don’t contribute – may seem unimportant now, but its impact can add up over the years when it comes to future earnings. According to Fidelity, a $5,500 IRA contribution with an average annual return of 7% could translate to $58,721 35 years later.[6]

Since the average long-term disability claim lasts nearly three years (34.6 months), the impact on your future financial wellness could be substantial.[7]

When Dave was finally able to return to work, he knew he didn’t want to every have to deal with a situation like that again. So he learned more about his company’s benefits, and realized how valuable short- and long-term disability could be. When his next open enrollment period came around, he signed up for these coverages to protect his income – both now and in the future.

A real solution

The fact is, as valuable as health insurance is, it’s designed to address medical costs associated with acute illnesses and hospitalization — not the financial impact of a chronic or long-term illness that can result in a loss of income and ability to save for retirement.

Disability insurance – both short- and long-term – helps prepare you to face the financial stress created by an unexpected illness or injury. With disability insurance, you receive a percentage of your paycheck while you recover, which not only helps you pay your medical expenses, but your everyday, recurring bills as well.

Only one in five Americans say they are very knowledgeable about disability coverage.[8] And that’s understandable. Even the name “disability insurance” can be misleading – the illnesses and injuries covered are often so common people may not think of them as disabilities. Pregnancy is the leading cause of short-term disability in the U.S., and musculoskeletal disorders such as back and neck pain and arthritis are leading causes of both short- and long-term disability.[9]

It’s likely more helpful to think of disability as “paycheck insurance” – because that’s really what it does.

Striking a balance

Almost everyone struggles to strike a balance between current needs and wants and the desire to save for the future. When a disability occurs, this balance gets even tougher to maintain. Don’t be caught by surprise by the financial effects of an unexpected illness or injury. Make sure disability insurance is part of your overall benefits package to help you keep up with both today’s financial responsibilities and tomorrow’s financial goals.

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^{[1] Social Security Administration, “Disability and Death Probability Tables for Insured Workers Born in 1999”, June 2020. https://www.ssa.gov/oact/NOTES/ran6/an2020-6.pdf}

^{[2] Federal Reserve, “Update on the Economic Well-Being of U.S. Households”, September 23, 2020, https://www.federalreserve.gov/publications/2020-update-economic-well-being-of-us-households-overall-financial-security.htm}

^{[3] Council for Disability Awareness, “Chances of Disability”, September 30, 2021. https://disabilitycanhappen.org/disability-statistic/}

^{[4] “2021 PwC Employee Financial Wellness Survey”, PwC US, January 2021. https://www.pwc.com/us/en/services/consulting/workforce-of-the-future/library/employee-financial-wellness-survey.html}

^{[5] Study Group: 118 employers, study retrospective time period: 6 years claim history (2012-2017), 8 years of financial history (2010-2017)}

^{[6] Lamberti, Patty, “Stop! Never withdraw from your 401(k) to pay creditors”, Money Under 30, April 7, 2019, https://www.moneyunder30.com/never-withdraw-from-401k-to-pay-creditors}

^{[7] Council for Disability Awareness, “Chances of Disability”, 2022. https://disabilitycanhappen.org/overview/}

^{[8] LIMRA, “2021 Fact Sheet: Disability Insurance Awareness Month”, chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/viewer.html?pdfurl=https%3A%2F%2Fwww.limra.com%2Fsiteassets%2Fnewsroom%2Ffact-tank%2Ffact-sheets%2Fdiam-2021-final.pdf&clen=448290}

^{[9] Council for Disability Awareness, “Family Matters”, 2021, chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/viewer.html?pdfurl=https%3A%2F%2Fdisabilitycanhappen.org%2Fwp-content%2Fuploads%2F2021%2F04%2FCDA-Family-Matters-2021-factsheet.pdf&clen=161887&chunk=true}

About Sharon Scanlon

Sharon Scanlon has written 2 posts in this blog.

Sharon Scanlon is the Senior Vice President of Customer Experience, Marketing and Transformation at Lincoln Financial Group. She serves as the Chief Marketing Officer and Head of Customer Experience for Workplace Solutions, overseeing two of Lincoln’s core businesses: Retirement Plan Services and Group Benefits. Additionally, Sharon oversees the transformation office function, ensuring the entire organization is prepared to sell and service new products and functionality. Sharon also manages the continuous improvement teams focused on creating end-to-end improvements for customers and employees, driving efficiency, cost savings, and laying the foundation for digital success.