Everyone dreams of a comfortable retirement, but not everyone has the financial intelligence to plan for it when they were young. For whatever reason, they let the years roll by until suddenly they see retirement looming in the distance. There is nothing wrong with that, so long as they realize they need to start planning now. Now is always the best time to start growing your financial intelligence for retirement.
If you have put off planning for retirement, there is no reason to panic. There is a good chance you can still achieve all the results you could have if you started earlier. It all depends on your situation and who you get to help you.
The first step is to find a financial adviser who can evaluate your portfolio and ask intelligent questions. Listen for these questions in your first meeting.
Finding someone who is knowledgeable and takes your situation to heart is crucial because the financial world is confusing. An adviser who knows how to short circuit the system will help you get started faster.
For most people, their finances are like a junk drawer. They stick all their assets in one place where they will not have to worry about them. The first thing an intelligent financial adviser will do is take everything out and organize it. Bank accounts, investments, insurance, and collectibles (e.g., stamps, art, coins, etc.) are what make up your estate and each needs a separate drawer, so you know what you have to work with.
Once your adviser has the lay of the land, the next step is to look at your insurance. Insurance guarantees your safety and the well-being of your assets. If you pass away, it will also keep the roof over your family’s head.
We live in a litigious society, so guard your wealth every way you can: home insurance, car insurance, life insurance, liability insurance, etc. Insurance policies cost only a few cents on the dollar but could mean millions in protection.
In the long run, everything becomes insurance: your bank account, 401K, pensions, annuities, bonds, and so on. To create financial security, you need to know where your cash reserves are, when to use them, and in what order. Order is critical because drawing on some accounts costs you money. For example, pulling funds from a 401K incurs taxes and penalties, but pulling from your life insurance does not.
A common rule of thumb is that you should have at least three to six months’ worth of cash on hand. That way, if something happens, at least you will be safe for the foreseeable future. But sometimes, if you need cash, the bank is not always the best place to turn.
Whole life insurance has two growth elements that make it essential when marshaling your financial intelligence for retirement. First, it has a guaranteed cash value, so you know exactly what it’s worth will be the day you buy it. Second, it has dividends, a portion of the company’s profits that are paid back to its policy holders. Dividends are considered a return of premium, essentially a refund on money you paid to the insurance company. They come back as cash, which you can withdraw, though not every financial adviser would recommend it.
You can also borrow money against the policy at a minimum interest rate. It is a beautiful solution because these loans do not appear on your credit report. In addition, you do not have to pay it back because the loan is covered by the face amount of your policy. For instance, if you borrow $10,000 from a $1 million policy and do not return it, your family still gets $990,000. And best of all, you do not pay taxes on it.
Most people think credit cards are bad, which is only true if you do not know how to use them. People get into trouble with credit cards because they think of them as free money, when in fact they are the most expensive form of money they could have. But if used correctly, they can also be the least expensive form of money.
You can borrow money against your credit card at a low interest rate. When you do this, many companies will tell you they are transferring the high balances at zero percent interest, but that is not true. There is no such thing as zero percent interest. What they are doing is charging a fee, usually 3-5 percent, during the loan period. Many companies will let you borrow up to $10,000-$15,000 at this rate, which is great, as long as you have a plan to pay it back on time.
Imagine this: you have $50,000 in your 401K and $50,000 in your life insurance policy. You could take cash from either of these accounts. But maybe it would be better to use the credit card. That way you would not have to touch your long-term assets. Paying three percent to the credit card company may be less than what you would pay on a loan from your life insurance policy and that might be the wiser decision.
Life loves to interfere with our projects. That is why people with true financial intelligence create backups. Say you decided to borrow money against your credit card. Everything starts well, but then you got stuck. Instead of paying back the entire loan, you only managed to pay back half. Now you are in trouble unless you thought ahead.
Backup plans give you options. Perhaps, in this scenario, you could borrow from your life insurance because at least that way, when you pay back the loan, you pay the interest back to yourself. Building financial intelligence for retirement is not just about earning a lot of money and working out how to spend it. That is how people go poor. It also about setting up alternatives to protect yourself when things go wrong. If you do not create choices for yourself, then you give someone else the power to make choices for you.
There are only two ways to make money in this world. You can get a job and make it yourself, or you can invest it and have your money make it for you.
Remember, what you earn today is only for today. Eventually, you will stop working and that money will be gone. But when you put your money to work, it never stops working. Before you retire, look for ways to lay money aside in places where it can generate income. For example, you might consider investing in:
How aggressive you can be depends on how long you have until retirement. But regardless of where you start, the sooner you begin the more you will earn.
Once you have created your plan, protected your assets, and built up your residual income and cash reserves, your final job is to pay off your debt. Sadly, debt does not go away after you do. It gets passed on to your family, so start looking for ways to eliminate it. For example, life insurance. It helps cover debt. Savings help cover debt. Low interest rates help prevent debt. Extra income helps you pay off debt. One extra mortgage payment every 12 months reduces interest on your home from 30 years to 21 years.
However, keep in mind that money spent paying debt cannot be spent elsewhere. Before committing to a plan, always talk to your financial adviser and consider the opportunity costs. There may be something more lucrative on the horizon.
When preparing for retirement, financial intelligence does not happen in stages. Planning is ongoing. As soon as you know where you want to go, you need to set deadlines for things to happen. Review your portfolio. Check your assets. Read your monthly financial statements. Talk to your adviser. Make sure your cash reserves are getting bigger and your debts are getting smaller. If you keep at it, it will happen sooner rather than later.
When planning for retirement, financial intelligence is how you create insurance for yourself. It is how you get that house on the beach or the sports car in the driveway. It is the greatest gift you can give your family because it means even after you walk out the door you will still be looking after them.
Tarek El Nabli is the founder and CEO of Parentis Health. Before moving into the medical field, he spent decades as a financial planner, helping people of all ages prepare for retirement and secure their financial legacy.