The following is a guest post from Shelli Elledge at Written FYI. Shelli is a business analyst whose interests are personal finance and healthy lifestyles. Some of her financial ideas differ from the mainstream, but she offers additional viewpoints about saving and investment. (Crystal’s Note: She’s also a sweety, so be nice whether you agree or not with her non-typical option, lol.)
In many ways, savings, investment, and retirement plans are viewed differently than in the recent past few years. Although the concept of saving for emergencies, large ticket items, and retirement is still the same, the tools are not as effective as they once were. The traditional plans, including money market accounts, IRAs and pension plans, are under scrutiny as to their stability in today’s economic climate and are questionable as to whether they are user friendly.
Savings and Money Markets
Savings or money market accounts earn miniscule amounts of interest, and then the interest earnings are taxed at the end of the year. This is nothing new. It means that the earnings on these types of accounts do not keep pace with the rate of inflation. To me, these types of accounts are not viewed as interest-earning but are simply a location to store one’s liquidity for temporary or short-term purposes.
Individual retirement accounts (IRAs) are retirement plans provided by various financial institutions. There are several different types but the overall benefit is the tax advantage. However, some of the disadvantages are that early withdrawals are penalized, mandatory withdrawals at certain age limits, meeting exemption requirements for withdrawals, and distribution amount requirements. In a nutshell, the most unappealing part is the tracking, the restrictions, the penalties . . . well, you get the picture.
Pension plans are not as common today as they used to be. Many corporations have replaced it with the more-common 401k plan. However, pension plans are still used by many government agencies as retirement plans for city, county, and state workers.
To put it another way, it’s the retirement plan that first-responders, firefighters, police men and women, and teachers, and other service workers rely on. Yes, the same public service workers who protect and serve the public’s needs on a daily basis. And it’s also the same type of plan that is being scrutinized in Detroit today because of that city’s dire financial problems. Many retirees and future retirees are playing the waiting game and are anxious to see how the bankruptcy proceedings play out. Although the immediate impact will be felt in Detroit, many other American cities are in similar situations.
So, if the typical savings and retirement vehicles aren’t really so attractive, what choices do we have to house funds for long-term? What I’ve done over the years is taken out whole life insurance policies. I know . . I hear the groans now but don’t shut me off yet.
My husband and I both have term insurance policies as well as whole life insurance policies. Term insurance is cheapest and we consider it a safety net in case we die. After all, it’s the cheapest type of life insurance. However, our whole life policies we have long considered avenues for long-term savings – with a death benefit. Yes, it is more expensive but it does more things.
For example, we’ve used our policies to buy real estate because we’re able to access cash value in the accounts. The insurance company considers them loans and we still pay them back, but the funds are liquid and it’s available for us to use. There are no early withdrawal penalties and earnings on the funds housed in our policy are not taxed. It forces us to put set aside funds, yes, just like we would set aside funds for a savings or retirement account. But we are putting our funds in a life insurance policy, which is a financial tool that we should have anyway.
What sorts of accounts do you use?