When I was a child I remember my mother telling me that I should always have a dime in my pocket. I guess this story is going to date me because there are many today who haven’t a clue what I am referring to. Why would I need a dime? Answer: To make a phone call at a pay phone in case of an emergency. Amazing how times have changed! With advances in technology, pay phones have all but disappeared. Notwithstanding, the need to have a proverbial dime in one’s pocket is ever present.
The concept of setting aside money for a rainy day is not new. Given our changing world it is a wise principle of economic constancy. One of the first elements I look for when reviewing one’s financial life is the existence of an adequate emergency fund. It’s a simple concept, but an important strategy. What if the car breaks down, an unexpected medical event occurs, a family member needs assistance, a loss of employment or some other unforeseen event? In each of these cases an emergency fund becomes a valuable asset.
For those raising younger families, setting aside a dime for a child’s education, be it a four year college pursuit, vocational school or skill certification is essential in today’s world of inflated tuition costs. As pre-retirees look to their golden years, they begin to realize that setting aside assets for a range of needs is a wise course of action. Its purpose could be to replace lost income from one’s working years, to combat the effects of inflation or to provide resources for a potential catastrophic illness.
To gain increased clarity, I often explain this concept as mentally siloing money. Now, since I don’t think “siloing” is a word, consider the image of a grain silo.
Wikipedia tells us that a silo is a structure for storing bulk materials. Silos are used in agriculture to store grain or fermented feed known as silage. Silos are more commonly used for bulk storage of grain, coal, cement, woodchips, food products and sawdust.
Mid-west farmers in grain-growing areas have groups of wooden or concrete tower silos, known as grain elevators, to collect grain from the surrounding towns and store and protect the grain for transport. In addition to transport, another purpose of grain silos is to guard against times of famine or unforeseen events. In this function we see our silo financial analogy illustrated.
Prospectively, what are the necessary financial silos one should establish? In the absence of a public defined benefit pension plan, the most notable would be a retirement savings plan (401k, IRA, SEP, ROTH, real estate, proceeds from a business sale, etc). For most, this represents a retirement nest egg that strategically replaces income that ceases after telling your boss that you have contracted a terrible eye disease. You know the ailment? You just can’t see coming into work any more! This usually happens in one’s mid 60’s.
The difficulty with this prospective baby boomer silo, is most are woefully behind the savings curve. The next problem is understanding how retirement income streams work, meaning how accumulated assets transition to a guaranteed retirement paycheck. Those that are strategically prepared and have built actuarial science into their plans can expect 7-13% of that asset for retirement income needs, whereas the more complacent must settle for only 3-4%.
Like the man who built his house upon the sand, this is a wake up call for the unprepared. The sobering reality is that the increased withdrawal rate of 7-13% is not dependent upon saving more, but simply positioning asset differently in pre-retirement. Americans under age 55 and some even up to age 60 can fix this problem if they act immediately, but they must take action. It’s far better if they put plans in place in their 40’s or before.
As already noted, in addition to this retirement silo, other silos including sequestered resources for emergency funds, college support, inflation protection, final expenses, a long-term catastrophic illness and assets for legacy intent are advised.
The secret to organizing these financial silos is one of strategic design. A casual observer might conclude that a separate financial silo be erected for each financial need. This would be terribly inefficient. In reality, certain financial instruments exist that can provide a multitude of financial preparedness purposes with just a few silos. Most do not know how to accomplish this objective, but those schooled on the downside of the distribution mountain have this expertise.
Get on the road to financial peace by setting aside and positioning your dimes in the right manner. You never know when you might have to make that emergency phone call.