Ray’s Take Insurance companies typically keep a relatively small amount of money in cash in order to pay claims, including a reserve to respond quickly to catastrophes. The rest of their funds they invest for the long term, focusing on options like corporate bonds and real estate holdings.
Insurance companies are effective in matching their assets (premium income) with their liabilities (benefit payments), and always have their eye on the long term. It’s not unusual for them to invest with a 30-year time horizon. They’re not interested in investments with a short-term payoff. Taking this long-term, fairly conservative approach to their investing usually pays off well for them. They are not distracted by short-term gyrations because their focus is so far down the road. Further, investment options that don’t make sense for short-term investors can be successful for long-term investors.
That’s why it would certainly not be a bad idea to think somewhat like an insurance company when saving for your retirement. After all, like insurance companies, you are investing for the long term – saving for a comfortable future that is still hopefully several decades away, and should last for decades after that.
You may not have all the resources and options of a giant insurance company – they can invest in things such as early stage equity investments, low liquidity real estate and preferred stock – but this doesn’t mean you can’t follow the same general principles.
Take a hint from their investing policies and look for investments that match your time line – the further away the goal you are saving for, the more long-term you can think. It certainly is working for them.
Dana’s Take People pay insurance premiums in order to have some protection in case of an emergency or major loss later. That’s because the future is uncertain and it’s best to be prepared.
For that same reason, it’s a good idea to pay “premiums” to your own emergency fund as well. Set aside enough money to get you through at least six months. It should be an account that you can access easily. The object for this money is accessibility and safety.
Once you have this fund, don’t touch it unless an emergency truly exists. It could be a lifestyle saver if your family’s primary wage earner became unemployed or unable to work. It could also make a big difference if your home was made uninhabitable due to fire or extreme weather.
Having this money set aside can help you avoid touching your other savings and investments where you may incur penalty fees or other costs that would only make your financial predicament even worse.
What would you give to avoid a financial mess for your family? Put aside that much each month and consider it peace of mind insurance.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at email@example.com.