Let me ask you a simple question: if you become disabled, how can you afford to make a contribution to your 401(k)/Profit Sharing Plan (PSP)?
Let me ask you another question: If you get disabled and are not making contributions to your 401(k)/PSP, what are you going to live on when you turn 65 and your disability insurance (DI) benefits run out?
These are questions that most doctors do not think about and ones that most advisors do not address (because they don’t know how to solve the problem).
Have you ever heard of Pension Protection DI coverage?
It exists and it’s shocking how little it costs to buy this type of coverage.
How does Pension Protection DI work? It’s pretty simple. If you become disabled, the insurance company will fund up X amount of money into a trust (the amount will vary depending on what you purchase) where the money is invested and will grow. When you turn 65, the insurance company pays you a retirement benefit from this trust.
Dr. Smith, age 40, has an annual income of $250,000 a year. Assume Dr. Smith traditionally funds his 401(k)/PSP in the amount of $40,000 a year. Now assume that Dr. Smith purchased retirement plan protection insurance with the maximum benefit of $40,000 a year.
If Dr. Smith became totally disabled at age 40, the insurance company would fund approximately $40,000 a year into a trust account where the money would grow and could be used in retirement. If Dr. Smith stayed disabled, his total cumulative benefit at age 65 would be $993,720.
If Dr. Smith purchased a cost of living adjustment with a 6% inflation rider, his total cumulative benefit at age 65 would be $2,205,396.
My personal opinion is that every doctor who earns $250,000 or more a year should have this type of insurance. It’s very inexpensive for the benefit provided (one that takes care of doctors after they turn 65).
Roccy DeFrancesco, JD, is author of The Doctor's Wealth Preservation Guide, and founder of The Wealth Preservation Institute. The DWPG has recently been approved for up to 21 AMA PRA Category 1 CME Credits™ in a self-study format. If you would like to purchase the book at a 33% discount as benefit for being a reader of Physician’s Money Digest so you can earn CME credits in the comfort of your home, e-mail firstname.lastname@example.org.