Q. My wife and I are in our mid-forties and have been self-employed for 20 years. All but one of our children are married and on their own. Our home is paid for and worth about $175,000. We have no debts other than an auto payment.

Unfortunately, we also have no real savings other than a couple of $5,000 CDs. We have no retirement benefits to look forward to except Social Security.  

We are, however, in a position to save about $1,500 a month. Six months ago I purchased a variable universal life policy ($250,000 death benefit) and put $1,000 a month into it.

My asset allocation in the portfolio is moderately aggressive. Having a limited concept of investments and retirement savings, I'm not certain if this is where I should be putting all my eggs. Is this a sound plan or should I be putting my savings in another nest?

---T.D., by e-mail.

  

A. The first thing you should do is give yourselves a pat on the back for having built the security you have by your age while being self-employed. It isn't easy. The second thing is to recognize that you still have plenty of time--- about 20 years--- to build a significant nest egg. Finally, an ability to save $1,500 a month will go a long way to building that nest egg.

The question is what is the most efficient way to get there?

You didn't, for instance, mention qualified plans. As an independent businessperson you and your wife could have SEP-IRAs which would allow you to make your savings tax deductible. Have the business make the contribution rather than taking it as a percentage of your income. In addition, if your income is below certain limits, you could increase your tax savings further by having individual IRA accounts. I think you should put the maximum into such programs before you make a major commitment to save money inside a life insurance policy.

What to do? Visit the office of a major brokerage/mutual fund firm such as Fidelity or Charles Schwab and learn about SEP-IRAs and IRA accounts. You might also think about having a Roth-IRA so that your money can compound without taxes and be withdrawn tax-free. This mechanism is a lot easier and less dangerous than tax-free borrowing against a life insurance policies' cash value.

After that you should do a needs analysis for life insurance. With one child still in school and all the indeterminate needs of self-employment, your $250,000 may not be adequate.

Most Americans are under-insured, not over-insured. Your insurance, logically, would have two parts. The first is insurance to make certain that you and your wife can complete your remaining child's education. This can be inexpensive term insurance. The second insurance is to help the surviving spouse complete the savings for retirement. This can also be a term life policy since you can buy 20 year guaranteed term life policies at very competitive rates. Presumably, you'll have built your savings in the next 20 years.

Finally, after you have taken all those steps you might--- repeat might--- consider the life policy that is absorbing two thirds of your savings cash.

  

Q. My wife and I just had a child and are considering the purchase of a larger home. I have always heard that housing costs for a household should not comprise more than 25 percent of income. Is that measure based on gross or net income? Also, should we include property taxes and insurance in the amount?

Finally, do you believe that the 25 percent measure allows for plenty of retirement savings?

---M.J., Dallas, TX

  

A. The 25 percent figure is a rule of thumb used for renters and is based on gross income. Like most such rules, however, few people live by it. Most young people in urban areas spend substantially more than 25 percent on rent. The financing guideline for homeowners is 28 percent of gross income for mortgage, insurance, and taxes. Some borrowers, particularly those with high incomes, can commit more of their income to basic home costs and I have heard of loans being granted into the high thirty percent range.

You should remember, however, that these guidelines were created primarily to protect the lender. They were NOT created to assure retirement savings for the borrower.

One way to increase savings is to base your calculations on the monthly payment for a 15-year mortgage. Then you'll have a choice:

•           You can actually pay your how off in 15 years and have an additional 15                years for added savings

•           Or you can pay on a 30-year mortgage and save the difference for 30 years.

Either way, you'll save more than people who max-borrow on a 30-year mortgage.

The only problem?   Going from 30 to 15 year financing will reduce the amount you borrow by about 25 percent.