Friday, November 9, 2018

Watch Out, World2: Reality Bites

So in our 30s we had little to no savings; 5-figure debt; two boys we wanted to send to college and then we needed to think about retirement. And our income was pretty small - I recall about $45k for our household.

By now, I was a Primerica Financial Services representative (2nd job). Through Primerica I brokered mutual funds and talked to people about liquidating their whole / universal life insurance policies, buying term insurance and, with the money left over, save into mutual funds sheltered in an IRA for their future.

We called this "buy term and invest the difference." Conversations covered how much money is enough for life insurance and how much is enough for retirement.

Determining the life insurance piece was easy.
Here's how:
Think of the insurance as income-replacement.
To your current salary, add a zero. That's the amount of life insurance you need.
Example: Someone making a $25,000 annual salary would need $250,000 of life insurance.
During those 20 years two things can happen: you have to use the insurance or you don't. If you don't have to use it, you save money for 20 years creating a savings equal to the amount of the policy. After 20 years you do not renew because you are now self-insured. If you have to use it, you put the balance in a high-yield money market and pay yourself a salary.
Looking into a crystal ball to answer the question "How much is enough for retirement?" was easier than I'd thought.
Here's how:
First answer the question, "If you could retire today, how much annual income would you like to have?" $100,000 was our answer.
Well, we applied the average inflation rate (3.6%) and found out we needed to have $1,250,000 to retire. OH CRAP! We'd have to have over 1 million dollars?!?!?
We crunched some more numbers and determined if we saved $345 a month (more than $10 a day) for the next 30 years AND got 12% interest, we could actually reach that goal. Hurray for compound interest!
Lost? Well, in the 1980s the Internet didn't offer so many resources. But here's my personal favorite - Chris Hogan's R:IQ Retirement Calculator if you'd like to know your own retirement number. If you want to find your own calculator simply search "retirement calculator" in your favorite search engine.
Our response?

We went out to eat and charged it on our credit card.

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