Why Disability Could Threaten Your Retirement

May 11, 2017

Imagine the following scenario. You’re nearing retirement. Maybe it’s less than 10 years away. As you get older, though, you start to experience more health issues. Maybe your chronic back or joint pain grows more severe, limiting your mobility. Perhaps you develop a serious illness like cancer or heart disease, and are forced to focus your energy on treatment instead of work. Maybe you’re involved in an accident that prevents you from working.

If you’re forced to take an extended leave from work, or even retire early, due to health issues, how would you support yourself? Would you be able to count on your savings? Would you be forced to withdraw funds from your retirement assets?

Think it can’t happen to you? Think again. According to the Council for Disability Awareness, 1 in 4 adults will suffer a disability at some point in life. The group reports that the average disability claim lasts nearly 32 months.1

Fortunately, there are steps you can take to prevent disability from undermining your retirement plans. Below are three steps you may want to consider. If you haven’t planned for disability risk, now may be the time to do so.

Identify expenses that can be cut quickly.

A budget is always a helpful tool, but it’s especially valuable during an emergency. Your budget can help you identify spending areas that can be cut quickly. For example, you might scale back on travel, shopping and other discretionary expenses. You could eliminate cable or move to a more affordable cell phone plan. Or you might opt for a less expensive car or even a smaller home. A budget can help you make informed spending decisions.

The key is to create your budget and identify these areas in advance. That doesn’t mean you should implement the spending cuts today. However, you should create a plan so you’ll know exactly which costs you could cut as soon as you suffer a disability.

Build a healthy emergency fund.

An emergency fund is an essential part of any financial plan. It’s especially important as you approach retirement. It’s generally wise to keep a few months’ worth of living expenses in a liquid savings account. However, as you approach retirement, you may want to build your emergency fund to an amount that could cover a year or more of costs.

A large emergency reserve could help you protect your retirement accounts. For example, if you suffer a disability and have to retire a year early, you could rely on your emergency fund to pay the bills. That allows your retirement assets to continue to grow.

Protect yourself with disability insurance.

Finally, disability insurance may be the best way to protect yourself from disability risk. A disability insurance policy pays you a monthly benefit to replace lost income if you aren’t physically able to work.

There are two types of disability insurance policies: short-term policies, which pay benefits for several months, and long-term policies, which could pay benefits potentially all the way up to age 65. Disability insurance policies have a wide range of adjustable features, so you can create a policy that meets your needs and fits into your budget.

Ready to develop your disability protection plan? Let’s talk about it. Contact us today at Grand Canyon Planning Associates. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.