How much money do I need to cover myself if I ever become disabled?

Question

Disability insurance is very expensive if your a self-employed business owner. For my craft, lawn service, disability insurance will cover me until I'm 62 years old if I am willing to pay almost $2,000 a month for this policy.

If I want to set up my own account, how much money will I have to have in my account today if I want to live off the interest and beat inflation until I'm at least 62 years old or older if I was to ever become disable? I am 37 years old and my gross income is $70,000 per year.

Answer 1

No way to calculate this - you don't say how much money you spend each year.  

But just take your annual expenses, and back into it, using a very conservative 5% return.  

IE, if your annual expenses are $25,000, divide by .05, and you get $500,000.  So, if you don't spend more than $25K a year, $500K is enough - and you'll beat inflation.

Answer 2

The idea is that the interest (or earnings) on an investment will pay your expenses.  We can assume 5% earnings, but we need to know what your expenses are, not what you currently earn.  Actually, many people today spend more than they earn, running up credit card bills or borrowing against their equity.  Anyway,  you could just look at how much you save every year and subtract that from your gross income to see what you are spending.  Or you can  figure your rent or mortgage, utilities, car payments, gas, food, debt, gifts, insurance, clothing, taxes, healthcare, charity, hobbies/activities, and inflation.

One estimate I have seen used is that you should be able to live on 80% of your curent income.  You should have some idea if you could survive on $56,000 a year.

If we figure a 5% return on an investment, then you need $1,120,000 to return $56,000 a year.  If you can survive on $56,000 thousand a year, you should start investing the extra $14,000 a year right away.

None of these numbers are guaranteed.  Investments may return more or less than 5% and it is possible to lose money invested in risk-based investments, like the stock market.  If the government keeps spending our tax dollars like a drunken sailor, inflation will only get worse.

This same analysis applies to people saving for retirement.

The difference is with retirement, you generally have a time frame to accumulate the necessary investment.