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Just how ready are you for retirement? In an extended interview with AARP, Jean Chatzky, the renowned personal finance columnist and TV commentator, shares her best advice on assessing your current and future financial situation, adjusting your spending, finding new ways to save and getting ready for the financial setbacks that inevitably pop up along the way.
Welcome to The First Word from AARP, a series of conversations with experts exclusively for new AARP members.
Today on The First Word, Jean Chatzky on how to plan for a safer, more secure retirement.
BL: Hello. I’m Bob Love, editor in chief of AARP The Magazine and the AARP Bulletin.
To those of you who listened to our March conversation with fraud expert Frank Abagnale, we’re glad to have you back. And to everyone else, welcome to The First Word.
Jean Chatzky is not only extraordinarily wise about all things money, but a breath of fresh, clear air on a topic that many people may find intimidating, which is why we feature her column, newly renamed “Chatzky to the Rescue,” in every issue of AARP The Magazine.
Jean is also financial editor of NBC Today, a best-selling book author and award-winning personal finance journalist. Her latest book is Women With Money: The Judgement-Free Guide to Creating the Joyful, Less Stressed, Purposeful (and, Yes, Rich) Life You Deserve.
Jean, it’s a pleasure to talk with you again.
JC: It’s nice to talk to you too, Bob. Thanks for having me.
BL: Of course. Listen, it wasn’t that long ago that most Americans didn’t feel the need to worry about retirement planning. It was assumed that a pension from work plus Social Security, the value in a home and perhaps upwardly mobile kids would see you through. What do you think has changed?
JC: In that equation? Only everything. When you look at our recent history, 25 years ago, just a little more than that now, we had the first 401(k). Companies had started to decide that the pension system was too expensive for them to bear long term. They wanted to start shifting the responsibility off of their shoulders onto the shoulders of employees themselves and now we are at a point where our 401(k)s, our IRAs, our other self-funding retirement accounts are, in addition to Social Security, primary sources of income in retirement.x
We’ve also got health care that we pay for ourselves and that gets more expensive every single year in the form of copays and prescription drugs. Our upwardly mobile kids have moved back home. We’ve got a new report on that just this week. As far as worrying about all of these things, I think we’ve got a generation of people who are fully aware that we are not in Kansas anymore.
BL: And I think that because of the terrific medical system that we have here, we’re living much longer too.
JC: Oh, no question. When we first started to receive Social Security, most people got it for a few years and then they passed away. Today, retirement lasts 30 years, sometimes 40 years. When I get asked a question from people, and I get this one often, “How long do I have to plan to live? What number do I have to plug into the retirement calculator when it asks me?” My answer is always 100 because living longer than your resources last is not a good thing. You’re much better off having plenty of money to live past your lifespan.
BL: We happen to know that running out of money is most of our members’, our readers’ number one fear, and rightfully so. As you age, your medical costs go up, your income is dropping. For many people, their only guaranteed income will be Social Security. Can people live comfortably on that in your opinion?
JC: Not generally. Social Security will only replace about 40 percent of the average person’s pre-retirement income. If you are going to live comfortably on that, it means really downshifting in terms of your life cycle. And then comes health care, which is the unknowable cost.
Fidelity is out with a study just this week that the average 65-year-old couple will need an additional $285,000 in retirement just to pay for unreimbursed medical expenses. That is, to put it into perspective, more that most people have in their retirement accounts in total. It’s a very, very scary calculus.
BL: It all does seem a little bit fraught. I believe your message over the years has been that each of us needs to arrive at retirement with some savings, but most important, a plan.
JC: Because people who plan, people who have a road map who have plotted out the direction that they’re hoping to go and the steps along the way have been shown to actually achieve those goals more than people who don’t plan. That’s true of any goal by the way. If you set a goal, you’re more likely to actually get there.
Even if you feel like you’re coming to the party late, that you haven’t done the work in terms of saving enough or investing aggressively enough or doing that plan, it doesn’t mean it’s too late. In the scheme of those lifespans we were just talking about, if you’re 50, you still have another 40 or 50 years to go. That’s a lot of time to work. It’s a lot of time to save and it’s a lot of time to plan.
BL: So, what would a good retirement plan look like if you were building it from the ground up for a person in their 50s say?
JC: There are some benchmarks that we use to figure out if you’re on track to replace your pre-retirement income in retirement. Basically, if you were to start in your 30s, you would have wanted to put away one time your income by the time you hit that 30th birthday; by 40, three times; by 50, six times; by 60, eight times and by the time you retire, 10 times.
Now, if you’re fortunate enough to still have a traditional pension, you can back off from those numbers a little bit by the amount that that pension will provide, but it looks like that to start, accompanied with some goals.
Retirement, just like personal finance, is very individual. It’s much more personal than people give it credit for and your retirement plan depends on what you expect your retirement to look like.
Do you have a house in which you have paid off that mortgage and do you expect that you’re going to continue to live in that house or do you plan to sell that house and maybe downsize and take a chunk of money and put it away?
You’re going to travel. You’re going to start a new business. You’re going to continue to work even though you are “retired,” which is what we see a lot of people doing. These are all variables and all they all move the needle on various numbers that can be adjusted to determine how much money you actually will need.
What doesn’t work is just assuming you can keep on going as you are, make no plans and all of a sudden, get to age 65 or 67 or whatever the date is for you, stop working and it will all be okay. That’s the ostrich retirement plan and that is not the one that we recommend.
BL: Very well-said.
A new member, Azalea, has sent us a question. Welcome, Azalea. She is 53. She works 50 hours a week. She doesn’t have any savings. She makes enough to cover her and her child’s expenses. Is there a retirement plan for people like her, she wonders?
JC: Yes, there is and it’s called an IRA or a Roth IRA. I understand, Azalea, there are many, many people who are living like you are and feeling like there is no money left to save. I would encourage you to do two things.
First of all, to start small. Open an IRA or a Roth IRA. Put some money in it every single time you get paid. You can start with $25 or start with $50, but start with something and transfer the money automatically. Set it up so that it gets transferred every single time your paycheck lands. What will happen is, more often than not, you won’t miss that money and you’ll start to see the balance in that account adding up. That will inspire you to do a little bit more.
If you’ve chosen a traditional IRA, you’ll get a tax benefit for making that contribution, so it won’t feel as if you’re taking as much money out of your own hands at the end of each tax year.
Don’t just put the money into the account but put the money to work. One thing we see, particularly where women are concerned, is that we don’t invest the money aggressively enough. Put it into a broad portfolio of index funds or into something called a target-date retirement fund, which will be managed by the brokerage firm toward the date when you are planning to retire and it will keep you in a mix of stocks and bonds that are age-appropriate for where you are in your work-life curve.
BL: Women like Azalea earn much less over a career than male counterparts, according to studies, but also live five years longer than men. It adds up to women needing, I think, extra planning and resources for their retirement. Would you agree?
BL: What unique money advice would you give to women in their 50s?
JC: It seems completely unfair; we have to save more, and we have to make sure that we don’t miss years of investing for retirement, even if we have taken a break from work to care for kids or care for parents.
A lot of research lately has pointed to the fact that far too many women have money sitting in savings accounts and checking accounts that really isn’t there for emergencies, but is there for the long term, because right now, the average savings account in this country is paying about one-tenth of one percent, which is nothing and less than nothing after you factor out taxes and inflation.
You’ve got to get it into the market. You’ve got to make sure that it is working for you as hard as you’re working for yourself and you want to be doing that automatically.
The other thing that I would say is if you are taking a break from work and you have a spouse in the workforce, understand that you still have the ability to make your own IRA contribution every single year. It’s something called a “spousal IRA.” There is an IRA, a Roth IRA option and you can make a full IRA contribution up to $6,000 per year plus an additional $1,000 if you’re 50 and over.
BL: Thank you, Jean. It’s a good moment to note that Jean hosts a weekly podcast for women on behalf of AARP called Closing the Savings Gap. Please listen and subscribe. Go to aarp.org/podcasts.
JC: Bob, can I just say something about that podcast?
BL: Yes, please.
JC: What we did on that podcast is take real women who felt like they weren’t on track for retirement and pair them up with financial advisers to help them get back on track. The situations are universal.
Whether you’re taking care of parents and that’s getting in your way or you’ve got too much debt or you’re still struggling with student debt or you don’t have a retirement plan at work, it’s a problem that we’ve dealt with on that podcast. Again, yes, I would encourage people to listen. They can find it at aarp.org/closingthegap.
BL: Fantastic. You mentioned the word “automatically” several times in our first few minutes. I think that’s a real issue for people; how to take their savings and make them automatic. There are apps now, correct?
JC: There are a ton of apps, but it’s also something that you can just do with your bank or do with your brokerage firm. There are apps like Acorns, Digit, Robinhood, they will all help you take the money that you are not spending and funnel it into either savings or investments.
The magic of a 401(k) retirement plan is that the money comes out of your paycheck before you have a chance to see it or touch it or spend it. Over the past decade and change, employers have been allowed to automatically enroll people in these plans and automatically bump up their contributions every single year.
We’ve got to take some of that automatic magic and give it back to the vast number of workers who are with small companies that don’t have retirement plans or who are part of the gig economy or who work for themselves. The way to set that up for yourself is to open an account, an IRA, a Roth IRA, a SEP IRA if you’re self-employed with a brokerage firm.
Elect a low-cost, diversified menu of funds to put your money in. Index funds are simple. They are a fine place for your money. Then tell that brokerage firm, “Every single month or twice a month when I get paid, I want you to reach your electronic fingers into my checking account and pull out $100 or $200.”
What’s magical about it is that then you can go and visit that account and you start to see that hey, I didn’t think I was a good investor, but look how much money I’ve racked up. I actually must be pretty good at this.
BL: Jean, how did you get interested in money? Were you interested in money as a kid? Did your parents steer you toward good money practices?
JC: They definitely did. My father was a college professor. My mother was a second-grade teacher and then she went back and got her master’s. We didn’t have a ton of money. We were very comfortable, but certainly not wealthy.
My parents taught us good money lessons. We were expected to save for the extras that we wanted. We were always expected to work. I think I started babysitting at 11 and I worked all the way through high school and college.
But I didn’t really get interested in personal finance until I was working for a business publication where I was able to write stories about people and their money. I think the money decisions that we make are completely fascinating. It’s such an emotional topic.
It’s so interesting how we do things financially that we know are not in our own best interest and we do them over and over and over again.
I’ve been able to report about personal finance for one-quarter of a century now and I’m still not tired of it because there’s always something new.
BL: Do you find that talking about money and families and relationships that it’s a problem in a marriage or partnership when one person tends to be the one who focuses on money and retirement planning?
JC: Yes, it’s a big problem. It usually gets broken down into budgeting or paying the bills for the woman and investing or trading or managing the retirement and other investment portfolios for the man.
The problem with this is that 90 percent of women will be alone at some point in our lives. If you look at the fact that we outlive our spouses, plus the fact that so many people are staying single longer, if not forever, plus the divorce rate, you get to that statistic.
Having to take over a financial life, having to take the reins of your financial life and manage things like investments when you’ve never done it before is daunting enough. Having to do it when you’re under an extremely stressful situation because your spouse got ill or your spouse died or your spouse left is awful. I have heard from so many women who have said, “I wish I would have known about this sooner. I wish I would have gotten involved in this sooner.”
The other thing that we know is that money causes a lot of problems in a lot of relationships. I get that. I think that we have unrealistic expectations that, just because we marry somebody, we are going to have the exact same goals and the exact same priorities. Anyone who has been married knows that that is just not true.
Providing yourself with a little bit of financial autonomy so that you can make some decisions about where you want to spend, where you want to give without having to consult each other is, I think, incredibly important.
BL: What about debt? We’ve heard from many of our members that they are carrying large amounts of debt into their 50s and beyond; car loans, mortgages, credit card balances or perhaps kids’ college. Here is the big question that comes to us many times: Which is smarter, what is the smarter move, paying debt down now or saving that money for the future?
JC: Let’s look at it as an arbitrage. Let’s look at it as where do I get the best return on my money. When you pay down a debt, the return on your money is equal to the interest rate minus the tax deduction. If you’re paying off a mortgage for example, your interest rate is around 4 percent if you qualified for a good mortgage, you get a tax deduction on that, so really that money cost you 3 percent. That’s pretty cheap money. It’s very different than paying off a credit card at 25 percent where there is no tax deduction. Student loans in the 6 percent, 7 percent and 8 percent range are somewhere in the middle.
Compare that to saving money but also, investing money. When you save money, like I said, you put it in a bank, you’re earning 0.1 percent, basically nothing. You’re losing money after taxes and inflation.
When you invest it, you are typically getting 6 percent or 7 percent a year returns on a pretty conservative level.
When you put it in a 401(k) where you get an employer match on that money, you could be getting a guaranteed 25 percent or 50 percent on that money right on the top.
That’s the filter that we use to make these decisions numerically. It would argue that if you have the opportunity to take the next dollar and put it into a 401(k) that gets matched or to pay off the mortgage early, you should absolutely put it in that 401(k). If you don’t have that option, but you’ve got credit card debt sitting there at 25 percent, that’s going to be the highest return on your money.
The emotional factor is also something that you need to consider. It’s particularly an issue, I think, when it comes to that mortgage. I am a big fan of getting out of your mortgage before you retire. I really am. I think it gives people peace of mind to know that no matter what happens, whether or not they are planning on working in retirement, unless they’ve got a ton of money that they can invest on their own knowing that they will have some sort of guaranteed paycheck coming to them in retirement, I think getting out of the mortgage is a good thing.
BL: I’m going to read a question from Folake, a new member. She asks how to get started investing in stocks and bonds.
We know that many of our members are a little bit leery about stocks, especially having lived through two downturns, if you are our age. How do you pick investments to use for your retirement savings portfolio?
JC: Let me just acknowledge upfront that I am a pretty bad stock picker. I spent a couple of years on Wall Street in an equity research department and the job of the people there is to be good stock pickers. I am trained stock-picker who is also a lousy stock-picker and as a result, I don’t pick stocks.
BL: What made you not good?
JC: It could have been the time. I did my research. I did my due diligence, but not a lot of the stocks that I thought would do well did well.
What did do well was the market as a whole over time, historically over decades. I believe and will continue to believe for the rest of my life that I will make my best investment decisions by buying very broad, very diversified index funds that are low cost because that is something that I can control.
For me, if you are starting to invest for your retirement, you could put together a total stock market index fund and a total bond market index fund, take 110, subtract your age and that’s the amount that you want to put into stocks. Put the rest in the total bond market index fund. That will be fine. That will be fine to get you going.
Or you could put all of your money into what’s called a target-date retirement fund. We were talking about that before where you are investing in a managed portfolio that is being managed based on the age or the year at which you think you will retire.
I don’t think that most people need to stress out about should I be putting my money into stock A, B or C. We know it takes at least a dozen and up to 20 stocks to build a diversified portfolio. That is a lot of work.
BL: And leave it there too; buy those low cost, broad funds and start to not think about the money.
JC: Yes, absolutely and add to them every time you get paid. Add to them when the market is going up. Add to them when the market is going down. When the market is down, it gives you the opportunity to buy more shares of those funds at lower prices. That’s really, really good. That’s buying low.
Then yes, keep your emotions as far away from the equation as you can. When the markets are having a bad day, turn off the television.
The people who are really, really unhappy about their investments at this point are the people who, in 2008 and 2009 when everything cratered, sold because they got scared and then couldn’t figure out where or when to get back in, so they sat on the sidelines. Many continue to sit on the sidelines.
The markets are up almost 400 percent or maybe 300 percent, I haven’t run the numbers in a while, but up so much since they were at that point. We know that the markets are going to be rocky. We know that short term, you are going to see a curve that looks a lot like a rollercoaster, but over time, historically what we’ve seen is that those bumps start to fade into the background and the overall trajectory is one that goes up.
BL: When people talk about their plan for their nest egg, what do you think is a sound strategy to talk about your home equity, the value of your home in your nest egg.
JC: I think of your home as an additional savings account that you can use to keep a roof over your head. That’s how I think of my own primary residence. It’s an additional pool of money. You could sell it and move somewhere else, downsize and put some of that money into your retirement portfolio.
One study took a look at people who were heading into retirement feeling like they didn’t have as much as they needed to make it through. What it saw was that people got scrappy and a couple of the ways that they got scrappy was by taking home equity in higher priced areas, selling those homes, moving into lower tax states or places where the cost of living were significantly lower or into residences that were significantly smaller.
All of those are viable options and we haven’t even gotten to the topic of reverse mortgages, which I’m asked about all the time. That is a pool of equity that can be tapped should you need to do it. It’s not a cheap way to do it and it’s not always the most cost-effective way to do it, but it’s there.
BL: I’m going to ask you a couple of quick ones as we get toward the end.
The switch to Medicare seems like a big transition point. Does it affect your health care spending? Do your out-of-pocket costs go down once you’re on Medicare?
JC: I think it’s a trick question. Your out-of-pocket expenses go up as you age. When we look at your out-of-pocket health care expenses, they tend to be fairly level actually until you hit your 80s and then they go through the roof.
BL: Jean, I have a feeling that this conversation might have created a little bit of stress for some of our listeners. I know our engineer, when we were talking about the benchmark for saving, was giving me the “Oh, my God, I’m screwed” look. People never feel, when comparing their journeys to other people, that they are ahead of the curve. Do you have any final words of advice or encouragement for folks for whom money is a scary thing?
JC: Yes, I would say bump up your savings by 1 percent and then bump up your savings again by 1 percent. I know those benchmarks are scary, but if you can get your savings to a level, including matching dollars, where you’re putting away a good 15 percent, you’re going to be fine.
BL: Terrific. Jean, I wish we could go on forever, but our time has run out today. Thank you so much for sharing your wisdom with us. This has been a fantastic conversation.
This is a good moment for me to note that AARP’s commitment to your financial security goes on. It’s where you live. It’s on all of our platforms. It’s in our publications, online, on our podcasts. We cover money and retirement topics in every issue of The Bulletin and The Magazine plus you can go to AARP.org/retirement for a wide range of calculators, tips, news and insights into retirement planning so it will take some of the fright out of it.
You already know that AARP members get lots of discounts, but these things change and evolve, so please, go to the members section of AARP.org, the benefits section for our most current list and to make sure that you are getting all of the value that you can from us.
Finally, a reminder that you can subscribe to Jean’s weekly money discussion for women, Closing the Savings Gap, at AARP.org/podcasts.
Thanks for joining us at The First Word from AARP. We’ll be back in about three weeks with another live event on how to play your perfect vacation without breaking the bank, featuring the acclaimed travel columnist, Seth Kugel, the Frugal Traveler.
Until then, be happy and healthy and welcome to AARP.