Your ability to consistently generate an income over a long period of time is the mechanism upon which your future wealth will be built.
There are a number of risks that investors face on the path to accumulating sufficient retirement assets. From one’s first paycheque to the date of formal retirement, it is likely that life will not follow a predictable trajectory, but will rather involve a series of curveballs, missteps and errors. In addition to investing enough to ensure that one is able to retire comfortably, effective planning should include identifying potential risks to your retirement funding.
During your pre-retirement years, your ability to consistently generate an income over a long period of time is the mechanism upon which your future wealth will be built. Any interruption to your earnings – whether temporary or permanent – will compromise your investment potential, and as such, loss of earnings is a risk that can, and should, be mitigated against.
One of the most effective ways of mitigating against this risk is by taking out disability insurance, either in the form of an income protection benefit, lump-sum disability, or a combination of both, depending on your specific circumstances. Many disabling illnesses are a function of ageing, so securing disability insurance when you have a greater chance of a favourable underwriting outcome is important. Once you suffer from any pre-existing conditions and/or illnesses, your application may be underwritten to exclude certain benefits or conditions which, in turn, can adversely affect you at the claims stage.
Income protection cover, which is an occupation-based benefit, is an excellent way to protect your earnings into the future should you become either temporary or permanently disabled. In general, when taking out an income protector, you will have the option of protecting between 75% and 100% of your income, depending on your needs up until your desired retirement age, but generally not past age 70.
If you are disabled before you have managed to amass your wealth, you will need to make provision for a capital amount that can be invested and set aside for your retirement, which is what lump sum disability cover can help you to achieve.
Determining your future income needs, particularly if you are relatively young, can be particularly tricky, but it is always advisable to err on the side of caution when agreeing on the underlying assumptions. While your premiums towards your capital disability cover are not tax-deductible, you will not be taxed on the payout.
Whereas disability insurance can be used to protect your future retirement, life cover can be effectively used to protect your spouse or partner’s retirement in the event of your premature death. While you and your spouse are still building up your retirement nest egg, it may be appropriate to take out sufficient cover on your life to ensure that your spouse is able to enjoy a comfortable retirement in the event of your passing.
Once again, as your personal circumstances change over time and as you move through life’s various stages, it is important to review the quantum and purpose of the life cover you have in place. Once again, as your net worth increases over time you may be able to reduce your life cover accordingly, and redirect any saved premiums towards achieving other financial goals.