In this second of two articles on my stewardship practices, I discuss my saving, investing, and protecting (insurance) approaches.
The stewardship principles that are most applicable to these areas are as follows:
- Don't spend all you have – save and invest for needs you know you will have in the future (Prov.6:6-6; Prov.21:20; James 4:13-15).
- Wisely protect what God has entrusted to you (Prov. 27:12; John 16:33; Acts 14:22).
There are a few other more granular ones that apply here and there, which I will highlight in the appropriate sections.
As with spending, debt, and giving, how I have applied these principles in my life may differ than how you do. I offer the following not to arrogantly suggest that my way is the "right" way or the only way, but instead that it was best for me and may be informative and helpful to you.
It is very possible that you saved, invested, and purchased insurance differently than I have. That's fine – the point is that it's about applying biblical principles consistently in a way that suits your situation, but not necessarily in exactly the same way that someone else does. There are literally thousands of options to choose from just in the practical area of investing.
1. I have saved regularly in my retirement accounts, making the most of my employer-match in my 401(k) and occasionally contributing to an IRA.
401(k) and 403(b) plans are one of the best ways to save for retirement. I was fortunate to have the opportunity to participate in a 401(k) plan for much of my working life. I always contributed enough to get the full matching employer contribution, and since most of my employers matched 100% of my contribution up to a certain percent of my salary, my contributions effectively doubled.
In addition to my 401(k), I also had a Traditional IRA. I didn't fully fund it every year as I didn't think I needed to save much more than what I was already setting aside in my 401(k). However, when I was in my 40s, I realized that I needed to play some catch-up with my savings since I was late getting started with a 401(k). So, I started adding to it and also took advantage of the IRS "catch-up" provision when I was in my 50s.
The tax benefits (mainly tax-deferral for traditional retirement accounts and tax-free for Roth accounts), greatly aid us in "saving for a rainy day," implied in Prov. 6:6-8 and Prov. 21:20. The key principle at work is that it is unwise to consume all we have and instead to set something aside for needs we know we will have in the future.
If you are fortunate to have access to a 401-type plan at work, I encourage you to take advantage of it. But perhaps you own your own business or are self-employed. If you own a company that employs others and provides a needed product or service or one that enhances the lives of others, then I say God bless you in it! You are probably uniquely called and gifted in this area. If you use your business not just as a way to make money but also to glorify God and serve others, then you are truly fulfilling the creation mandate to encourage human flourishing on the earth by providing jobs and products and/or services that promote the common good.
There are a variety of options open to you as a business owner or as a self-employed freelancer. These include 401(k)s, SEPs, IRAs, and others. All of these plans are, in my opinion, part of God's common grace and we can freely make use of them while being careful not to save too much.
2. I have maintained a "balanced" investment portfolio in my retirement accounts for most of my life.
By "balanced" I mean that I have almost always tried to balance risk and reward by having both stocks and bond in my portfolio, usually in a 70/30, or 60/40 stocks-to-bonds ratio. As a recent retiree, my ratio is now inverted closer to 35/65, but it would still be considered "balanced" but with less risk.
There is a lot of data to support the idea that you can balance a portfolio by adding bonds to equities such that you take less risk without significantly reducing returns over the long term. Even so, in retrospect, I might have been less-risk adverse, especially when I was younger.
There are different ways to construct a "balanced" portfolio. You can do it with a mix of stock and bond mutual funds or ETFs, or you can just invest in a single balanced fund. Some target-date-funds would also qualify as balanced. I have used all of these at one time or another, but I currently use a mix of stock and bond mutual funds an ETFs; most are passively managed, but a few are not.
The biblical principles that apply here are the need to plan for future needs (principle #1), and others such as some risk-taking is commended if done wisely (Pr. 31:10-31; Ecc. 11:1-6), diversification as it relates to investing as a risk management technique that mixes a wide variety of investments within a portfolio (Ecc.11:2), and a slow and steady path to wealth creation (Proverbs 13:11).
Also, taking on too much risk can be tantamount to gambling, which is highly discouraged in Scripture as it presumes on the future and ignores God's sovereignty (Prov. 16:33; 1Tim. 6:10).
The current evidence suggests that the next few decades may not be so kind to those with "balanced" portfolios. Future returns on both the stock and bond components will probably be lower. (This is especially true for bonds given persistent low-interest rates.) Therefore, if you have a higher risk tolerance, and especially if you are younger, you may want to invest more heavily in stocks.
Dave Ramsey recommends that you invest 100% in stocks, diversified across growth, value, and income categories. That strategy may be great for you but terrible for someone who has a very low-risk tolerance. In any case, this violates no biblical principles unless you do it out of greed or a desire to "get rich quick." Just make sure you have the risk tolerance for it, meaning you won't get emotional and sell at the wrong time when the stock market goes south.
Although Dave doesn't recommend it, I suggest that you consider reducing your stock allocation as you get closer to retirement to deal with sequence-of-returns risk. You may not go as low as 35% as I have, but tamping down volatility to some extent may help you sleep well at night (the "SWAN" factor).
3. I prefer a portfolio of low cost, passively managed index funds with a focus on income. I don't currently own any annuities, but that doesn't mean I wouldn't purchase one in the future.
It may surprise you to learn that I have never owned a single share of stock that was not given to me by an employer. I didn't jump in the dot com craze in the 1990s or the bitcoin craze of the last few years. And I certainly am not going to buy into the latest "big thing" – marijuana stocks.
Instead, I have always invested in mutual funds (and more recently, ETFs). This was not because I thought it was wrong; I just never wanted to expend the time and energy that I thought would be necessary to do it well.
My personal approach is now what I would call a "some growth and more income" strategy since I am now retired. My plan certainly involves growth, mainly using dividend-oriented stock funds, but it is still balanced. Because I am not getting income from work, I like getting those dividend and interest payments each month or quarter. But I am also aware that some asset classes will do better than others, which will be helpful when I have to spend from principal, hopefully after selling with some gains.
The overall returns I expect to receive are reasonable, perhaps even probable, but they are certainly not "guaranteed" like with some kind of annuity. My investments are subject to stock market volatility and interest rate risk (gulp!). So, although I don't currently own any annuities, that doesn't mean I would not purchase one in the future to secure an income "floor" and reduce the overall risk of my portfolio. Were I to do so, it would probably be the more simple and lower cost single-premium immediate annuity (SPIA).
The principles here are similar to those applied to nos. 1 and 2 above, but I would add "providing for the needs of your family" (1 Tim. 5:8) as that is the primary goal of generating a reliable income stream over the course of a long retirement, hopefully, one you don't outlive.
Some people "buy and hold" individual stocks. One of the richest men in the world, Warren Buffet, does it for a living. You can buy stock in his company, Berkshire Hathaway, which owns stock in other companies. You can also diversify by buying stocks in different industries. There is nothing in Scripture that prohibits you from investing in individual stocks unless you become overly greedy and end up gambling instead of wisely investing in good companies.
You may be more oriented toward an actively-managed portfolio, which means you are paying an advisor to make good investing decisions for you. There are fees involved in this kind of arrangement, so make sure you know what you are invested in and why, and what it costs you. Most people will benefit from an advisor's help, especially when navigating the choppy waters of retirement planning.
Those of you who are nearing or already in retirement may prefer "guaranteed" returns from an annuity as opposed to variable (and uncertain) returns from a risk-based portfolio invested in stocks and bonds. Both approaches are good options for retirement. If you wanted to leverage aspects of both, you might consider the "floor-with-upside" approach, which I discussed in depth here.
4. I never wanted to be a real estate investor.
I had only owned one rental property many years ago – it was the house that I grew up in after my mother passed away and my father moved in with my wife and I. In some ways I did it out of necessity, but I didn't like it. I had some terrible renters, had to evict them, and in the end, I lost money in the deal. I know lots of people have made lots of money in real estate, and I know it can be an excellent source of passive income, but it wasn't for me.
That said, there are other ways that I have invested in real estate, such as through a Real Estate Investment Trust (REIT), or maybe a mutual fund that holds multiple REITs, such as the Vanguard Real Estate Index Fund Admiral Shares (VGSLX), or the ETF equivalent (VNG). I have owned VNG in the past but don't currently have any in my portfolio, but because they can be a great income-producing asset, I may add one in the future.
I haven't used them, but there are also "crowdfunding" real estate opportunities which allow you to participate in a diversified set of small investments in various properties through companies like Fundrise, which invests in private real estate. Rental real estate is just another form of investing, so the principles in nos. 1 and 2, above, apply here as well.
You may own a rental property or two, or more. You may even be in the real estate business and have rental properties all over your city. In doing so, you provide a much-needed service and can also generate a steady income stream for yourself. You will benefit from the income stream rents provide and also capital appreciation. The only thing you have to be careful of is using too much leverage, as many found out during the real estate crash of 2008, and there have been others. Dave Ramsey recommends you buy rental properties with cash – great advice if you can swing it, but it's certainly not a "sin" to have a mortgage on a rental property. Just make sure you understand the risks involved, especially if you own multiple properties that are heavily leveraged.
5. To plan for the unexpected, I have used the typical insurance products, including life insurance. For most of my life, I have owned term life policies, not whole- or variable-life insurance products.
Like most people, I have had the requisite property and casualty insurance; some were required (home and auto for example), and others more discretionary (umbrella liability policy). I have tried to keep my insurance costs low, but inflation has caused premiums to increase, and I now pay more than I ever have.
I was fortunate to have employer-sponsored health insurance for most of my life, but my wife and I are now subject to the vagaries of the government's Medicare program. Overall, it's pretty good, but as I have written about before, it's not free – not by any means.
I purchased a small whole life insurance policy from a friend's father not long after I was out of college and married. I knew I needed some and it seemed like the right thing to do at the time. As I got older and needed more coverage, I began to realize how expensive those kinds of products are. Most people think of life insurance as precisely what it is – insuring against a risk you can't afford to take, which is the loss of life and the future income stream that represents. So, when I looked into it further, I realized that term life would give me greater coverage for less money. By doing so, I could then invest the difference and avoid mixing investing with the simple risk management function.
The central biblical principle that applies here is the need to provide for our family in the unlikely event that we depart for heaven on the early train. Some may think that life insurance isn't trusting in God's provision, but another way to look at it is that it is a form of God's gracious provision; in fact, it is part of his common grace.
The younger you are, and the more dependent others are on you for income, the more you need life insurance. I recommend you purchase fixed-term for that purpose. If you already have a whole or variable life, it may make sense to keep it; that is a conversation to have with your insurance representative.
A lot of people are still being sold whole life insurance policies, and they don't make sense for 99% of people. (The other 1% bought the policies decades ago and are using them for estate planning purposes). The fees are extremely high, the coverage of life insurance is insufficient, and the cash value also accumulates VERY slowly. It would be better for most people to buy a 20-year term life insurance policy and redirect the money they save on premiums towards their retirement accounts.
If you have a different opinion, there is no biblical prohibition against purchasing a whole- or variable-life product. Just be sure you want (or need) to mix your investments with your insurance and fully understand the costs and complexity involved.
Pretty boring, right?
As you can see from this article and the previous one, overall, my finances are pretty dull. And somewhat conservative. But I happen to believe that when it comes to financial stewardship, boring is good. Complexity and sophistication can sometimes cause more problems than they solve. However, being overly conservative isn't a good idea sometimes. Looking back, I think I could have been slightly more aggressive in some areas. That said, I have no regrets – my relatively simple, "slow and steady" approach has so far worked out okay.
Some of my financial stewardship decisions are based on conviction, some are preferences, and some are based on emotion. For that reason, unless something is specifically commanded or prohibited in Scripture, the right answer for you will be how to best apply wise biblical principles to your situation based on your values, convictions, preferences, and emotional temperament.
Sometimes, we will make a mistake. You may think back on one and think, "that was an emotional decision, not the best stewardship decision." I want to remind you that most financial decisions have an emotional component, and does because you did something based on emotion doesn't necessarily mean that it was wrong.
Just because you are emotional doesn't mean you are irrational. For example, if you are moved by compassion to give away a significant amount of money to a needy person, you are not irrational, certainly not from a biblical viewpoint. If you knew, however, that the needy person was likely to use the money to purchase illegal drugs, that would be irrational.
You're allowed to make choices because those choices will let you sleep better at night: "If you lie down, you will not be afraid; when you lie down, your sleep will be sweet" (Prov. 3:24, ESV). That's as good a reason as any!