I looked at her and asked her if she thought I was Blinki the clown or a professional. I conducted a needs analysis and told her that her friend was sending her toward bankruptcy with nothing at retirement. Let's look at a needs analysis:
The analysis is based on the financial pyramid. There are basics that everyone must have. You must have car insurance, life insurance, health insurance, and long-term care. These protect you from life's perils and unexpected expenses that could jeopardize the income you accumulate in the future. You also need a checking account which directs where everything will go.
Next, you should have six months of your salary in savings before attempting other investments. This does not mean you go to your local bank and take out any savings account they have. We have the World Wide Web at our fingertips, and we should use it. There are many banks that give higher interest rates for a savings account than your local bank can give you for a CD. It also provides liquidity without penalties like a CD would cause.
Once you have an emergency fund, then and only then should you explore fixed investment. Those investments could include a money market account (this is nice for a high interest rate and excellent liquidity), savings bonds (they accumulate interest tax deferred), and fixed annuities (they typically have highest interest earnings over bonds and what banks have to offer).
After you have comfortably reached $100,000 or so in your fixed account, you can then explore risk investments. This is when you could invest in some stock, mutual funds, commodities, investment real estate, variable annuities, and, of course, your 401(k).
What? Wait just one second. Right now you are probably figuring I haven't gotten enough sleep or my wife poisoned my coffee. I'm here to tell you that I am completely in my right mind. Or at least the voices in my head tell me I am. Anyway, everyone is saving for retirement in the wrong vehicle. Trust me, you can't take an F-350 on the lake and hope it won't sink while you are trying to catch fish. This is just like you can't afford to put your money at risk in a mutual fund that your 401(k) offers.
401(k) was a big push in the '90s for corporate America. It was a retirement benefit that had its genesis in a bull market. Move from the bull market to a bear like in 2001 and 2002. Then you have a big loss. This is a loss that will take some ten to 15 years to recover from. That's a real long time before you get back to where you were before. Most 401(k) s have some sort of fixed account, but they generally pay less than a bank CD. This is why you should wait until you are in a position to lose your money or simply place your money in better places.
