A Personal Bank

from WSJ.com

Colby Olds decided last year that he needed more control over his retirement savings and his finances in general.

Mr. Olds, a business-development executive for Vertical Prepaid, a provider of global prepaid and electronic-payment solutions, based in Sandy, Utah, decided that saving for retirement through a 401(k) was too constricting. So, based on advice from friends and online research, he moved his savings into a whole-life insurance policy that generates tax-free growth and still gives him access to his money.

Mr. Olds, 35, says he wasn’t comfortable locking his money away in a 401(k) until age 59 1/2. “So much is going to happen between now and then,” he says.

He and his wife, Tiffany, who live in American Fork, Utah, were concerned about funding possible emergency expenses and the needs of their family, which includes four children, ages 11, 8, 5 and 3. They also worried about stock-market declines ravaging their investments, he says.

The couple, married 14 years, has relied exclusively on Mr. Olds’s income since becoming parents. Mrs. Olds, who previously worked in fashion design and sociology, has been a stay-at-home mother and will likely do community-based work when their children are older, says Mr. Olds.

He closed out a 401(k) account totaling $50,000 in 2008. After taxes and early-withdrawal penalties, about $30,000 remained, which he used to buy a whole-life insurance policy through a local broker. Mr. Olds says the switch allows him to act as his own banker. He can borrow from the policy and make payments, with interest, back into his own account, instead of to a lender. For example, he borrowed $23,000 to buy a Dodge Caravan, which he’s paying off at 8 1/2% interest over a four-year term. “I feel like I’m driving my retirement plan,” he says. “My car payments are now my retirement savings.”

Mr. Olds wasn’t concerned about giving up matching company contributions to a 401(k), because his investment in the insurance policy, which pays dividends, protects him from the volatility that has recently devastated the stock market. He says he receives a “healthy” single-digit rate of return. Additionally, his family would receive a $2.1 million death benefit if he died, he says; with a 401(k), they would receive only the funds he had saved.

Mr. Olds hopes to accrue enough in the policy to fund the purchase of an income-producing asset, such as a condominium. He’d pay the debt back to himself while collecting the cash flow from the investment property.

At retirement, he can decide to withdraw a set amount per year, which, he says, he won’t have to repay. However, the death benefit would be reduced by the amount he withdrew.

Mr. Olds says his family’s finances have remained stable amid the current market chaos. “I’m not looking at 2009 trying to figure how I’m going to dig myself out of the market,” he says. He tries to sock away 10% of his income, but some months are better than others, he says.

Mr. Olds is using the global economic crisis as an educational opportunity for his children. He says the kids have been worried because some school friends have moved unexpectedly after their parents lost their jobs.

“It’s surprising how much discussion we’ve had about the economy with such a young family,” he says. The family agreed on certain cutbacks in order to ease the children’s anxiety. They decided to eat out less and to cut back on expanded cable-television services. “That made them feel better,” says Mr. Olds.

—Suzanne Barlyn