We all know the story of the Three Little Pigs. Those three boys had mooched off of Mama Pig long enough, and she told them to hit the road. Like any good Mama, before their departure she warned them about the wolf. But not all of the little pigs took the warning to heart, and so came the straw, stick, and brick houses with some huffin’ and puffin’, and they all lived happily ever after. But not all stories in with happily ever after. Let’s take a look at those three houses.
Three Planning Houses
The straw house is built using an employer-provided 401(k) with a 5% elective deferral, no emergency fund, little to no life or disability insurance, no estate plan, a large home and new car with 30-year and six-year financing, respectively. One little huff and puff, and this house comes crashing down.
The stick house is a bit stronger but still susceptible to the huffin’ and puffin’. It adds some basic insurance coverage, a small savings account, simple wills, and removes the consumer debt that burdened the straw house. Still not strong enough to stop the big bad wolf, I’m afraid.
Now, the last house is built to withstand. It’s built with solid bricks: retirement accounts like Traditional IRAs, Roth IRAs, employee retirement plans, investment accounts. It includes planning for risk and insurance such as life, disability, and long-term care. There are wills, powers of attorney, healthcare directives, trusts, disciplined savings, the assumption of inflation, and Social Security and Medicare planning. We can even renovate the house with education planning for children or grandchildren. Maybe some charitable planning.
This house is built to last!
Why This Story Matters
We’ve discussed the building blocks of the three planning houses. Now, let’s take a look at the wolf, or in this case, wolves. Some aren’t predictable as you might imagine, while others are not. Here’s a brief list:
- Premature death
- Disability or long-term illness during our working years
- Job loss or layoffs
- Loss of income due to any of the above
- Lifestyle creep
- Identity theft
- Expensive breakdowns (e.g., automobile or a HVAC system)
- Aging parents that require time and costly care
- Dying without a will
- Changing family dynamics
- Outliving assets
- Failing health in retirement or the need for long-term care
- The cost of healthcare in retirement
- Business failure or liability
- A global pandemic
- Market volatility
I could go on. Some of these wolves, we have already faced.
Others, we will almost certainly face.
Moral of the Story
We’ve known the story of the Three Little Pigs since our childhood. There are many positive morals to glean from it: Hard work, dedication, and long-term planning. However, we also find procrastination, instant gratification, the preference for immediate pleasure, and using shortcuts.
We know there are things we need to do or change, and there are houses to be strengthened. We need solid bricks. Let’s make a plan or beware the wolves.