The Kennon Retirement Insurance Plan

One of the Things That Helped Me …

From time to time, you may come across reference to my “stupidity” insurance or my “reserve” fund.  I’ve had a bunch of readers write me over the years and ask about various comments I’ve made so I thought it might be useful to explain it.  My parents, siblings, and Aunt Donna have always known about my investing but virtually no one else did when I was a child (by the time I got into high school, though, it was all I talked about so hiding it was no longer an option).

For those of you who are older than 14, this isn’t going to do any good unless you have children or grandchildren that may benefit from some personalized version of it (which is why I’ve never written about it).  By the time I was older, we had put almost all of my siblings on a modified system that helped to guarantee they would enjoy the same outcome in their own retirements.  This plan has some resemblance to the dividend trust program I described in an article on student loan debt.

How the Stupidity Insurance Fund Came About

One of the first things I did when I was a child and figured out the time value of money, and how powerful it could be, was to create a plan that would ensure that no matter what I did or how successful I was, that I would retire rich.  For years, I called this my “stupidity” insurance or my “reserve” fund because it was designed as a sort of self-written insurance policy that no matter how royally I screwed up or how bad things became in life, there was a huge “compounding machine” working in the background for me.  I started toying with its development when I was in 4th grade in a tiny town called Savannah (before I was in 7th grade, I had lived in seven or eight different cities because we moved a lot).  I think it came about because of the biographies I read where you’d have formerly successful business people that lost everything, or millionaire rock stars that ended up bankrupt and broke.  My goal was to do everything possible to make that a virtual impossibility.

The program worked like this: If, starting at 14 years old (which was 4 years in the future at the start of the program), I could save $500 per month by working after school or doing side projects for people, and I could park the money at 5% until I was 30 years old, I would have roughly $141,945 in this insurance fund.  I’d kick in the extra $55 to make it an even number, so let’s call it $142,000.

This $500 was my “insurance premium”, so I didn’t think of it as saving or investing because that is what my brokerage accounts were for – for all intents and purposes, this money didn’t exist to me.  I treated it like an expense, or a car payment.  I did everything possible to get it into tax-advantaged accounts such as a Roth IRA or SEP-IRA because I wanted the money to be able to grow tax-free when it reached what I called “the vesting date”, which was my 30th birthday.  This was the date at which I would stop contributing money to the fund and split everything that had built up since I was a kid into different asset classes (stocks, bonds, mutual funds, real estate, options, etc.) and invest it in such a way that it could be passively ignored for years.  In many cases, the law requires you to take distributions from your retirement accounts by the time you are 70, so that would be 40 years of compounding.

If this passive money earned 10% (I have a history of earning much more, and I planned on utilizing things such as self-directed IRA accounts that would allow me to actually buy an apartment building or hotel, for example, as the money grew but I’m keeping it there for the sake of conservatism; most people should bet on 7% to 8%), by the time I reached 70 years old, the “insurance fund” would have $6,426,814 in it.  There would be virtually no taxes owed on this money because of the types of accounts in which I had placed the funds.

Most research shows that even in a Great Depression scenario, withdrawals of no more than 4% per year mean that you’ll never run out of money.  At a 4% rate, I could take $257,072.56 in dividends out of the account each Christmas for the rest of my life.  That’s $21,422.71 per month after taxes that I could live upon, simply because of money I saved from the time I was 15 to 30 years old without ever contributing another penny.

To put it another way: I would never have to save another penny beyond my 30th birthday, and anything else I built up such as businesses I started, retirement plans, brokerage accounts, home ownership, etc., would all be extra (and, if I did my job correctly, would dwarf the insurance fund in value at retirement). But if I utterly, totally, and completely screwed up life and blew everything I ever made and became a total profligate, I’d still retire with a monthly income of $21,422.71 after taxes plus any social security for which I qualified.  That’s why I called this my “stupidity” insurance.

The Psychological Effect of Having Your Own Stupidity Insurance

Some psychologists and money managers have written about similar programs, which they call your “go to hell” money.  They call it this because you know that no matter how bad things get, whether or not you lose your job, change careers, or get divorced, if you are unhappy, you can get up, walk out of the building, and tell everyone to go to hell.

The main benefit of the program is intellectual freedom to pursue what you want to do without fear.  It could be argued that one of the reasons I launched companies after graduation, rather than take a job at Merrill Lynch or Goldman Sachs, was because I knew if I failed, I’d still end up rich and I could always get a job tomorrow.

Related posts:

1. I Will Probably Add Shares of Nestle to the Retirement Insurance Plan (But They Still Seem Overvalued)
2. New Stocks and Cash Added to The Kennon Retirement Insurance Fund (or “Stupid Fund”)
3. Some Interesting Surprises Hidden In Your Insurance Policy
4. Wal-Mart Ends Profit Sharing, Ups Retirement Plan to Offer 6% Dollar-for-Dollar Matching on 401(k) Savings, and More
5. Berkshire Hathaway Board of Directors Approves Share Repurchase Plan
6. Dividend Investing In My Retirement Account – Part II (Six Month Update)
7. Dividend Investing In My Retirement Plans
8. Retirement Investing: A Married Couple Working for Wal-Mart Could Retire and Live Very Comfortably
9. Reynolds Tobacco Company and Its Legendary Employee Stock Ownership Plan
10. A Visual Picture of the Kennon Green Enterprises Business Model