This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/
Life Insurance Sniper Three – Instant Gratification
As a child, I grew up in many cities near Los Angeles. I remember that going to the store with my mom was something I always looked forward to because more times than not, she would allow me to buy a little toy. One time we went to the store and I wanted her to buy a parachute soldier to throw in the sky and watch it parachute to the ground. I asked my mom to buy it, but she refused. I remember giving her my puppy dog eyes, which usually worked. She didn’t budge. I whined and then cried, and when she still said, “no” I gave her the silent treatment.
Although I didn’t like what my mom did at the time, it taught me a valuable lesson that I now understand and live by as an adult, which is, you must have discipline because you can’t always have what you want. My mother could have given in to my whining and crying, but she held her ground. I have used that same principle not only raising my kids, but also in my decision-making as an adult. I love nice things, but at the end of the day, they are things that lose intrinsic value after the newness wears off.
As a country, we have not learned the value of deferring gratification. We allow our emotions to take over, and when that happens, we buy things we want as opposed to living beneath our means. As we seek to gratify our immediate desires, we put off the need to save money until some other time. We are seeing the symptoms of this thinking more than ever among the growing number of retirees. The young adults of the 60s who lived life to the fullest are now finding themselves unable to take care of their basic financial needs today.
Life Insurance Sniper Four – Procrastination
This sniper is the deadliest of all because no amount of consulting, coaxing, or coaching can rescue someone from themselves. Conscious and consistent action is the only remedy, which is simply a matter of an individual making a decision to change. To put this in perspective, consider the following:
Alexis is 22 yrs. old and just graduated from college. She moved back home and decided to save $500 a month into an account that earned 8%. At age 30 (8 yrs.) and two years of marriage to James, she chose to stay home with her son. She never contributed another penny to her investment, but simply allowed the interest to work for her. When she turns 65, she will have $ 1,019,085.03
At 22, John graduated from college and got himself a car and a nice apartment. With his entry level position, John didn’t have $500 a month to save. John is now 40 yrs. old and has a wife and two kids. He has lots of financial obligations, but realizes that he needs to prepare for retirement at age 65. He struggles, but manages to put away $500 a month in an account that earns 8% for the rest of his working life (25 yrs.). When he is ready to retire he will have $473,726.49.
Although Alexis only saved $48,000 and John saved $150,000, Alexis has more than twice as much money as John at age 65 because she did not allow the procrastination sniper to help her justify why she should wait to save money while she was young. Alexis had to live at home even though she was adult, but a few years of sacrifice made a significant difference later in life.
Procrastination feels harmless during the years that we find valid reasons not to save money. John’s desire to get a new mode of transportation and live independently makes perfect sense. In fact, we would consider John as a person who acted responsibly. The insidious nature of procrastination is precisely why it is so dangerous. Left unchecked, one year slips into another until we find ourselves unable to live the great lifestyle during our retirement years as we envisioned our entire lives.
As we stated earlier, inflation has a major impact on our financial well-being. According to the Bureau of Labor Statistics, the average rate of inflation since 1914 is 3.35 percent. Justin recently received a promotion and wanted to make a responsible decision by taking a portion of his extra income to invest. He was not sure exactly where to put his money, but he was concerned about losing money in the stock market. After Justin had a conversation with his credit union, he decided that a CD or money market account might be his best move. Even though he was not happy with .5 percent rate of return, at least it was better than nothing, and much better than losing money.
Even though Justin took responsible steps to invest a portion of his disposable income, his money now suffers inflationary risk. In other words, if Justin had $10,000, it would take 21.5 years to lose half of its value if inflation maintained a constant rate of 3.35 percent. On the other hand, that same $10,000 would take 144 years to turn into $20,000 in Justin’s credit union. Justin realized that a CD might not be a good way to invest his money.
Justin started asking questions because he was determined to find a way to invest his money. He asked his Human Resources Manager at work if they offered a Roth 401(k) because he heard that he could pay taxes on the money he contributed, and not have to pay taxes when he retires. Unfortunately, his employer did not offer that plan. Finally, Justin sat down with a responsible financial planner named Maria who took time to learn his needs and came up with a solution that addressed all of Justin’s financial concerns.
Having identified the 4 Snipers to Life Insurance (what prevents those from getting life insurance), in the next blog post, I will start with the solutions life insurance provides, giving justification to using life insurance as an effective financial planning instrument. The next blog post is: Life Insurance as a Financial Swiss Army Knife.
