What is a retirement fund to be used for? Are you really going to wait until you are 70 years old before you dip into your lifetime savings? History teaches us that not everyone lives that long. And of the people who do many have to dip into their savings more than once. So what is a retirement fund to be used for?
I think the answer is simple: it’s used to get you to your retirement. For most Americans there is no hope of saving enough money for retirement. Not judging by today’s economy, which is built on lower-paying jobs, worse benefits, and a declining middle class.
We have to rethink how we save and plan for retirement because the 401(k) system is a complete and total disaster. Millions of people have poured their hearts and savings into 401(k) plans that they had to drain during the Great Recession and other financial disasters. Left without the means to repay those loans on time a lot of people have had to eat the stupid 10% penalty and pay taxes on those savings plans withdrawals.
In my opinion it is better to keep your money in a post-tax investment plan. You have more control over it and you don’t have to worry about paying penalties if you need to withdraw it quickly.
And today there are two plans that work best for people who need flexibility: Universal Life Insurance and Investment Broker Money Market Funds.
You hear a lot of trash talk about life insurance policies. The financial gurus want you to buy only term life insurance because “you only need it while you have a family and mortgage to worry about”. That is stupid and irrational. You need life insurance to take care of your burial expenses, to pay off any debts you still owe when you die (and that may include a large medical bill), and to help tide over your survivors (if you have any). No one should expect to get rich off of life insurance but it has been poorly managed by people who follow the advice of popular financial gurus.
Universal Life insurance works a lot like Term Life insurance, except you keep the policy for as long as your accumulation account has some money in it. You only need to put enough money into your Universal Life accumulation account to keep you insured through bad times. I think you need to keep about two years’ worth of premiums in there.
But there is another reason to invest a little more money in your Universal Life policy. I’ll come back to that shortly.
The other fund you should invest in is a money market fund. These funds don’t pay much money right now because of the low interest rates. Fortunately inflation is not a problem so you are making a pretty safe bet by investing your savings in the money market fund.
You want to save up at least a few thousand dollars before you think about spending that money on any long-term investments like stocks, bonds, or options. And when you do purchase an investment you don’t want to drain your money market fund. I recommend you keep at least 1 month’s expenses in that fund, plus a little extra. Once you get that “cushion” amount in there you should be saving until you can invest about $1000 at a time in whatever stocks, bonds, options, or mutual funds you want to buy.
Why $1000? Because you’ll feel more satisfied with your investment strategy if you buy in blocks of $1000 (or $2000, depending on how fast you can save money). You won’t be nickel and diming your savings into nothing with broker fees, either.
Best of all, you won’t be locking up your money in a stupid 401(k) or IRA plan where if you have a financial emergency you have to “qualify” for a loan. Borrowing from yourself (and paying interest back to yourself) is great, far better than borrowing money from a bank or finance company, but don’t burden yourself with unrealistic repayment plans and penalties.
Keep your money under your control but stashed away where you cannot easily spend it. By using that money market fund as a cushion between you and your long-term investments you’ll be less likely to sell off shares during the low end of their trading cycle. You also want to keep your investments for at least five years so you can take advantage of the Long-term Capital Gains Tax, which is less than the Short-Term Gains tax.
Now let’s talk about your Universal Life Insurance policy again. That accumulation account is an even better source for emergency loans than your money market account. You do pay interest back into the accumulation account as you repay your loan so you can build up your cash value again. But the great thing about borrowing from your Universal Life policy is that you can repay the loan on your own terms.
If you keep up your premium payments you don’t have to rush to pay that loan back. And it doesn’t disrupt your investment schedule because you’re not dipping into the money market fund.
But which should you build up first: insurance or money market fund? Go for the insurance. The thing about Universal Life policies is that their rates increase as you get older. You need to lock in the lowest possible rate at as young an age as possible. You’ll be glad you did this when your friends and relatives are renewing their Term Life insurance policies. They will all be hit by sticker shock, paying higher premiums for less value. And they won’t be able to skip premium payments or borrow against their policies in an emergency.
Now, let’s go back to the original question: How much money should you save for your retirement? I think the answer is obvious: everything you save should be used for your retirement, unless you need it before then.
The point of your saving strategy should be to constantly save as much money as possible. As long as you can save money you will be that much farther ahead when it really is time for you to retire.
Don’t burden yourself with unrealistic pie chart plans that allocate X% to 401(k) retirement funds. The 401(k) idea looked good when it was first introduced but it has proven to be a true disaster for the American middle class. Stay as far away from annuities and IRAs as you can get. Any savings plan that comes with special fees and penalties is not a savings plan, it’s just another way to gouge you of your hard-earned money.
If your savings is not paying you something it’s not savings. If you cannot get your money quickly without paying fees it’s not really your money, either. That is the only drawback to the insurance policy. If you take out a loan the insurance company will charge you a processing fee but it is usually relatively inexpensive. And there is no 10% penalty. You don’t even have to pay taxes on the loan because they are already paid.