Retirement planning in one easy lesson
By Jeffrey Reeves MA
As I have said on many other occasions, Behemoths -- big government agencies like the IRS, Fannie and Freddie, big investment firms, mutual funds, and stock insurance companies, big insurance agencies like AARP posing as advocates, big unions, big community organizations like ACORN -- have misled Americans about the how-to of creating wealth and managing personal finances. This is most apparent in the failure of most Americans to reach seniority with the resources to retire with any degree of security.
The Behemoths buried the wisdom paid forward by the founders of America that empowered Americans and American business for over two centuries and made America and the American lifestyle the envy of the world. The principles that underlie the wealth of many Americans and the practices that those principles support embody the wisdom of the founders that is re-emerging in the early part of the 21st Century.
Prior generations of Americans -- from Benjamin Franklin until today --had four main financial goals. My parents, over a dozen uncles and aunts, and most of their contemporaries followed these financial rules of the road and all of them retired with peace of mind about money.
There are no secrets to this strategy. It's really quite simple.
Principle No. 1: Get out of debt and stay out of debt.
In 1958, after 10 years in their first and only home, my parents had a mortgage burning party. Dozens of relatives and friends attended, all of whom had already had their own similar parties or were looking forward to them. A couple of years later, my parents bought a new car. They paid cash, which they borrowed from one of their participating whole life insurance policies. They repaid the loan in less than two years.
The corollary to Principle No. 1 is that if you must borrow funds, borrow from your life insurance policies. That way, when you retire, the expense and burden of debt will not weigh you down, deplete your income, or force you to continue working for the man.
Principle No. 2: Save enough money to take care of your wants and needs and to deal with life's surprisingly unsurprising surprises.1
As my parents aged, they wanted to expand their home, create a family room to accommodate regular visits from several grandchildren, and provide easier access to the basement and laundry area for themselves. Because they had no mortgage, car payments, or other debts, and because they had saved money in both their credit union and participating whole life insurance policies, it was not a financial or emotional burden for them to build and pay for the extra room. A few years later, after they had replenished their savings and repaid their policy loans -- remember, they had no debt to others, only debt to themselves -- they helped my younger brother buy his first house with an off-the-books down payment loan. My brother repaid the loan within five years.
The first corollary to Principle No. 2 is this: What most Americans consider a reasonable emergency fund -- savings equaling three to six months living expenses -- is not only insufficient, but also unrealistic. Credit and money in risk-based financial products -- some of them intended for retirement -- becomes the fallback for most Americans, in the absence of adequate liquid savings.
The second corollary to Principle No. 2 is to first assure your security with savings that are not at risk, and don't consider what the Behemoths call investing -- but Benjamin Graham calls speculation -- until you have substantial savings and no debt.
Principle No. 3: Peace of mind during retirement derives from having an income you don't have to work for and you won't outlive.
When my parents finally retired, they withdrew interest from their savings and borrowed from their participating whole life insurance policies to supplement the meager retirement income my father received from his union. Mom contracted pancreatic cancer and died at home a few years into her retirement. My father lived for several years, made a few extra dollars by mentoring apprentices in his trade. He also died at home, when his heart gave out.
The first corollary to Principle No. 3 is that money used to buy anything -- especially investments and most especially investments in retirement accounts that are subject to whims of the IRS -- guarantee only that they guarantee nothing.
The second corollary to Principle No. 3 is that the money that eliminates debt in Principle No. 1 and takes care of the wants and needs of Principle No. 2 is the same money that locks in secure income when a retiree needs it most.
Principle No. 4: Pay forward both the wisdom gained from following the principles and practices of the Founders and the wealth accumulated by following them.
The proceeds from my parents' life insurance policies, their savings, and the value of their lifelong home added up to enough money to allow each of the surviving children to measurably reduce their debt, increase their savings, and lock in a small future income that they won't have to work for and won't outlive.
The corollary to Principle No. 4 is all that you need to secure a worry-free retirement is the prudent use of money in the lifetime that precedes retirement. There is no need for 401(k)s, IRAs, or their equivalents. They subject you to the whims of the Behemoths that sell them and the Behemoth of Behemoths that regulates and controls them. There is no need to chase the highest returns and subject yourself and your money to the necessary losses that chasing returns guarantees.
If 21st Century Americans follow the model laid down by the many generations that preceded us...
- pay off their mortgages and all other debt
- save money in participating whole life insurance, local credit unions and banks
- lock in retirement savings -- not investments -- along the way
- teach their children to do the same
1I recommend not less than three years gross income to my clients, and most find that surprisingly easy to accomplish.