When Am I Self-Insured?

Justin is married with four kids. At what point will he become self-insured? Dave has a quick answer and a thorough explanation.

QUESTION: Justin in San Antonio is married with four kids. At what point will he become self-insured? Dave has a quick answer and a thorough explanation.

ANSWER: You are self-insured when the people you leave behind have enough money to eat without you. If you have $10,000 in each of their 529 plans, then your 3-year-old should be able to go to college with no trouble. But your 11-year-old won’t. There, you aren’t done.

With $300,000 in retirement savings and a paid-for house, you are getting very close to taking care of your wife and feeding the kids. But the way you ask yourself the question is this: If you died today and your wife no longer had your income, how would she live? Would $300,000 take care of her?

You say you make between $500,000 and $800,000 a year, but the income generated by your $300,000 nest egg would only be about $25,000 a year. You need some more in investments before you drop your insurance.

The idea is to answer the question of whether or not your wife and kids can live just fine on the income off of the investments if your personal income disappears. That’s the way you say self-insured. You are getting very close because you’ve got everything paid off. That’s a great first step. You are building up your nest egg; that’s a great second step.

When I moved into investments, I bought two things with my money: income-producing real estate that I pay cash for and good growth-stock mutual funds. You’re doing a great job. Make hay while the sun shines because right now is a good time for you. Hopefully it will continue forever, but if it doesn’t, make sure you set the money back and don’t spend it all because you’re doing a great job so far.

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