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Getting You Prepared for Your Financial Future

Bob Edwards talks with Suze Orman, Jean Chatzky, Jane Bryant Quinn and Steve Vernon about saving for retirement

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Bob Edwards: Hello, I'm Bob Edwards with an AARP Take On Today. As the saying goes, if you fail to plan, you plan to fail. It's especially true for retirement planning. That may sound simple, but it's also easier said than done, so today we're bringing you tips from previous episodes on preparing for your financial future. Today we'll hear from Suze Orman, Jean Chatzky, Jane Bryant Quinn, and Steve Vernon. Joining us to break down and build on these tips is AARP's Jean Setzfand. Welcome, Jean.

Jean Setzfand: Thank you.

Bob Edwards: Tell me about your work here at AARP.

Jean Setzfand: Sure. The work I do here at AARP is running educational resources. Prior to coming to AARP, I spent about a decade in the financial services industries: banks, insurance companies, asset management firms. Of all the programs, as much as I can have a favorite child, financial education, quite frankly, is my favorite.

Bob Edwards: We'll hear from financial experts Suze Orman, Jean Chatzky, Steve Vernon, and Jane Bryant Quinn. Each will talk about retirement savings. You should not take social security until age 70.

Suze Orman: Yeah. 70 needs to be the new 65. What I mean by that is that, if you think you're going to retire at 65, what's so sad is that you probably don't realize that you will spend more years in retirement than maybe you ever did working. If you could just move that figure from 65 to 70 in your head, then you would have five more years of accumulation on your retirement accounts, five more years that you're not withdrawing from your retirement accounts, five more years to work and generate income to pay off the mortgage on your home so you don't have a payment after you have retired, and five more years to let your Social Security actually accumulate, assuming that you are healthy and going to live a normal lifespan, so that you can start taking Social Security at 70, which is a lot bigger paycheck for you than at 65.

Jean Chatzky: Yeah, 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. You can start with $50. Start with something, but transfer the money automatically and 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.

Bob Edwards: Our listeners can visit aceyourretirement.org, which has resources to help you get on track, including a personalized action plan of steps you can take for a more secure financial future.

Steve, how much does Social Security replace income, and how should people adjust?

Steve Vernon: Well, Social Security would replace anywhere from, say, one third to two thirds of your income. It really depends on what your pay is because Social Security replaces a higher percent of your income for lower-income people. They acknowledge that lower income people may not have the resources and the capability to save, so they give them proportionately more.

There are two aspects to Social Security that I like to mention. First of all, as I mentioned earlier, it's almost a perfect retirement income source so it makes sense to optimize it. A lot of people say, "No, Social Security is not enough." Yes, for most people, it's not enough, but that doesn't mean ignore it. You still want to get the most value from that, and so I encourage people to get the most they can from Social Security.

I've got a book out, The Retirement Game-Changers, that tells about the strategies that people can take to optimize their Social Security. Optimizing it is the first step, but also realizing that, for most people, it is not enough, at least not enough to replace your current standard of living. I encourage people to either consider working longer, start saving. If you haven't saved already, you can start saving. I think if you haven't saved enough money right now, you'll want to look at strategies for continuing to work as long as you can and find work that you like doing, gives you social connections. These really are the levers that people have as they're approaching their retirement years.

Bob Edwards: What advice would you give to people who are nearing retirement and carrying debt?

Jane Quinn: Well, I think I would say you should try to pay off that debt. You can be carrying debt, but you can look forward and say, "I have enough income in retirement, so this is going to be okay," but you will get more and more worried about it as you get older. I would say that, if you have debt that it's going to be difficult to pay when you retire, start repaying it as soon as you can and even if that means don't put money into your 401k this year. Pay off the debt instead because it's a huge return on investment.

The return on investment equals the interest rate. If you have a credit card bill that's charging you 18% and you pay, every payment you make is an 18% return on your money guaranteed. I would try to pay off the debt at least down to a level that you feel that you can handle with the kind of income you have in retirement. Of course, ideally, pay it, but we're talking consumer debt. Mortgages are different. If you're carrying a mortgage into retirement, you're probably going to have to budget it into your regular monthly expenses.

Bob Edwards: Each of our experts has a different strategy to save for retirement. How do you find what's right for you?

Jean Setzfand: It is very individual. I really like the fact that you're pointing to the fact that every person has a different circumstance. If you listen to all of the different strategies that the experts said, there were four of them, and two of them focused on Social Security. That's the one I gravitate to the most because of three different reasons. The first is it's a savings tool that's practically universal. If you've worked for 10 years, paid into Social Security, not only are you but your spouse both eligible for this benefit.

Secondly, Social Security provides a lifetime income stream when you actually start to collect. Most of us don't have access to a traditional pension anymore, and this is the only source of lifetime income that pays you for the rest of your life, so really important on that point. This guaranteed income provides the most financial stability. If you want peace of mind, this is something that you need to pay extra attention to.

Last but not least, I think too many of us actually make the mistake of grabbing the money as soon as possible. Suze talked about 70 should be the new 65 when, in fact, a lot of people actually go even younger than that. You are eligible for early benefits as early as 62. You take, again, a haircut or a reduction on that benefit. Too many of us actually take advantage of that. That's, I think, one of the most important strategies, again, that we all should think about. It's easy for us to make a mistake of taking it too early. That really sacrifices, I think, our long-term stability because we just aren't building enough of that sort of guaranteed foundation for the rest of our lives.

Bob Edwards: It also goes up. You get a little adjustment for cost of living, modest, but it does, it does change.

Jean Setzfand: It does. It does, and that's important. You get the cost of living adjustment. Also, if you actually delay claiming, each year it goes up 8%. Now, where else can you get that return guaranteed?

Bob Edwards: Jane Bryant Quinn's advice seems quite simple. Pay off your debts in full if you can. Well, what would happen if you didn't pay off your debts before you retire?

Jean Setzfand: Well, it's interesting, right? A lot of the savings strategies talk about savings and income, but I love this guidance from Jane because, frankly, if you... What she's basically saying is, in debt, if you can pay off your debt, it actually reduces a fixed expense, potentially, in your life. A fixed expense is, essentially, something that occurs over and over again. For example, your mortgage, your car payment, even some of your credit cards, every single month you're going to have to pay a bill, right? The sooner you can actually reduce that or get rid of it, that means that amount that you have to pay in retirement goes away. You have the flexibility to actually almost increase your income by not having to pay down this recurring expense, this fixed expense, which if you have, again, more income to spare, discretionary income, it actually improves your standard of living.

Bob Edwards: Jean Chatzky's advice to those late to the retirement game was to open an IRA or Roth IRA. What other ways are there to save later in life?

Jean Setzfand: I love Jean's advice for a couple of different reasons, so I'll start there first. One of the things that she noted is the automatic nature of that IRA or Roth IRA where you pay yourself from your paycheck. Research indicates that you're 15 times more likely to save for retirement when you actually have this workplace-based type of savings. I think that's really important because, first of all, you don't miss what you don't see. If you're taking this away from your paycheck already, you're not likely to kind of rob yourself.

Bob Edwards: That's what was so sweet about a pension. Yeah.

Jean Setzfand: That's right. Exactly. That's exactly right. The other thing that I'll say even more is you want to also try to increase that. If you're later in life and thinking about savings, you actually want to think about increasing that amount moreso. Let's say you have an IRA or you have a Roth IRA, you're paying yourself. If you get a raise, make sure you also increase the amount that you're actually paying into. If you're lucky enough to actually have a 401k, your employer provides that. They have catch-up contributions. The IRS actually encourages you to save more if you're older. I think the increase in contributions are probably up to $6,000 more if you reach the age of 50 because, again, it's this notion that you should save more as you get later in life. It doesn't sound that much fun, I get it, but again, if you get a raise or if you get any increase, try to think about putting more away.

Bob Edwards: Steve Vernon says that you should factor in Social Security when planning your retirement. Is that really enough?

Jean Setzfand: Oh, it certainly isn't enough, right? I think, again, you have to be careful and really smart about your Social Security strategy. Waiting as long as possible to claim is definitely the right thing to do. You want to increase that floor. Once you go from there, then you can plan everything off of that. I really like how he uses Social Security as the foundation. I absolutely think that's the right thing to do.

Bob Edwards: Which is why Suze Orman suggested that one should consider retiring at 70. Should that be the new norm?

Jean Setzfand: If we are all so lucky to be able to retire at 70, I absolutely would recommend that being the new norm, but that's not the case for a lot of people. At least go with the adage of waiting as long as possible. Definitely consider not taking it at 62. Figure out what your full retirement age is. It's no longer just 65, quite frankly. For most of us, it's actually 66. The longer you wait, again, you get that boost of 8% every single year. Where else can you get that? 70 is a good number to anchor if you want an anchor. You don't reach the full maximum amount until 70, so knowing that number is a good goal.

Bob Edwards: Next we'll hear about investing and investment strategies from Steve Vernon and Jean Chatzky. Tell me about the retirement strategy that generates consistent paychecks from your 401k and IRA savings.

Steve Vernon: That's a strategy to think of your savings as a retirement paycheck generator. The reason is that, when you come upon retirement, you've got a lump sum of money. It might be the most money you've ever seen. Too many people wing it. They just look at their savings as a checking account, and they start spending money from their savings. I've seen this happen. They just spend their savings down, and it gets down to about $50,000, and they have this, "Oh, no," moment where they realize that they're going to be alive for another 10 or 15 years, but they only have 50,000 left.

Instead, I suggest think of your savings as a generator of a monthly paycheck and set up that paycheck to last the rest of your life no matter how long you live. Then you can just spend that paycheck. People are so used to managing their finances around a paycheck that I suggest setting up a retirement paycheck.

Jean Chatzky: I mean 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. That money needs to be working because, right now, the average savings account in this country is paying about one-tenth of 1%, which is nothing, and less than nothing after you factor out taxes and inflation. You got to get it into the markets. You got to make sure that it is working for you as hard as you're working for yourself.

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. That's the amount that you want to put into stocks. Put the rest in the total bond market index fund. That'll be fine. That'll 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, stock B, stock 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.

Bob Edwards: Jean's advice to women was to take some of your savings money and start investing. Why are people not investing their savings more?

Jean Setzfand: I think women tend to focus on the here and now. Having an emergency fund, first of all, is important, and so I think it's sage advice from her to say that emergency funds are good. It's also very wise advice for her to say don't overuse that, quite frankly, because your money's not working for you. It is important to really think through a more sort of well-rounded strategy rather than being too safe, too conservative.

I will point out, however, there's research out there, a Federal Reserve board actually noted that 4 in 10 adults have trouble covering an unexpected expense of even $400, so there are a lot of people who aren't actually taking advantage of the emergency savings either. Do consider having a rainy-day fund. It is important to do that. Rule of thumb is make sure you have enough to cover three months worth of expenses. $1,000 is your roughly monthly expense? Have 3000 in that rainy-day fund.

Bob Edwards: Jean Chatzky recommends having a diverse portfolio investment. What risks are you taking by not diversifying?

Jean Setzfand: Jean also mentioned, in the emergency fund example, if you put too much of your eggs in the emergency fund, again, it's mostly a savings, very conservative type of account and, therefore, your money's not working for you. That's an important thing. You have to, essentially, put a lot more money in the bank in order to cover yourself for retirement because, again, your money, your assets, your savings, they're not growing at all because there's no interest that's helping that amount, the base amount grow.

If you go to the opposite end and you're too risk-loving, and so you put your all of your eggs into a risky portfolio that promises high returns, and you need your money in the near future and, all of a sudden, something... Let's say you put it in foreign assets abroad, and something happens and everything goes away. Then you have nothing left either. Diversification is all about spreading your risk, some in more conservative, some in more risky so that, when you pool it together, you have, essentially, a more well-rounded sort of average return so that there's some working for you but also some in more conservative accounts that will be there when you need it.

Bob Edwards: Steve Vernon's advice to take money out of your 401k and IRAs incrementally, like a paycheck, what are your thoughts on this strategy and what other approaches are there?

Jean Setzfand: Yeah, it's very good advice that Steve is giving. I think he mentions the drawdown strategy in his example. He mentions that it's bad if you draw down too quickly. It's bad if you don't draw down quickly enough, quite frankly, and you've been starving yourself and, towards the end of your life, you have a lot of assets left that you actually could have used to actually increase your standard of living. His drawdown strategy by applying a set amount is helpful because it smooths out what you can actually pay yourself from your retirement assets.

General rule of thumb that a lot of planners provide is roughly about a 4 to 5% draw down rate. Just the theory behind that is 4 to 5% is usually lower than your actual rate of return on your portfolio, and so there's a little bit of sustainability so you're not drawing down too quickly, not too slowly. That's kind of the theory behind it.

Bob Edwards: Lastly, we'll hear from Suze Orman, Steve Vernon, and Jane Bryant Quinn about accounting for physical and mental health in retirement. You're a big believer in saving for long-term care.

Suze Orman: I am a big believer in that. My own mother lived til she was 97 years of age. Years ago, when she was in her sixties and I was a financial advisor seeing clients at the time, I begged her to buy a long-term care insurance policy. I told her I would pay for it. It didn't matter. I just wanted to know, if something happened, that she would be okay. I did the same thing with my aunt and my uncle.

My aunt and my uncle listened to me. My own mother says to me, "Suze, I'm never going to need it. Don't worry about it. Look how healthy I am." Well, starting at the age of her late 80s, Mommy did need it, and it cost Suze, because I was the one who was financially responsible for her, 20 to $30,000 a month for over seven and a half years to take care of her in the way that I could afford to, number one, but that I wanted her to live. My aunt and uncle were doing the exact same thing and, because they had long-term care insurance, it really didn't cost them anything. It was a real shame.

What if you don't have a little Suze that can take care of you that way? I love long-term care insurance, if and only if, not only can you afford it if you happen to purchase it within your 60s or whatever age you are but every single year until you are at least 84 or 90 years of age because that is the average age of entry into a nursing home.

You also have to know that, not only can you afford what the premiums are when you purchase it, but would you be able to afford it if the premiums doubled or tripled over those years? Because that is what's happening to them? However, you will spend less on all the years that you have long-term care insurance on the premiums than you will spend for one year in a nursing home. It's something that everybody really should look into if an only if they can easily afford it. Otherwise, do not do it.

Bob Edwards: Are there ways to navigate the almost inevitable healthcare costs that come later in life?

Steve Vernon: Well, yes. That's another of the challenges, and this is some of the game-changing challenges that I address in my book, Retirement Game-Changers. Healthcare costs are significantly higher for you as you enter retirement. When you were working and your employer paid for your healthcare, they, on average, were paying for 80% of the cost of that.

Steve Vernon: If you're retiring before Medicare kicks in, that's the most tricky situation because you may not have your insurance from work, and you've got to somehow make it to age 65 when Medicare kicks in. That should be part of your homework if you're considering retiring early. You've got to find medical insurance somewhere.

Then, once you're eligible for Medicare, some people breathe a sigh of relief and they think, "Okay. I've made it to 65," and they assume, just because Medicare is called medical insurance, that it's the same kind of insurance they had while they were working. That's a bad mistake because Medicare has significant gaps, significant deductibles and copayments.

Everybody ought to pick some kind of a plan that supplements Medicare. There are two types. There's a Medicare supplement plan, which pays for Medicare's deductibles and copayments. Then there's a Medicare Advantage plan that operates like a PPO that you might've had or a managed care that you might have had while you're working. Those are the options you want to explore. That, again, is part of that homework that you need to do in your 60s to see which kind of plan might work best for you.

Bob Edwards: What risks are people not considering in retirement planning and savings?

Jane Quinn: I think the risk they're not considering is more of the emotional risk. You do the planning. You try to figure out, "What's my risk?" What are you retiring to? It is not uncommon for people to retire and then, oh, say, "Oh, this is great. I can sleep until noon. I can stomp down to Starbucks and have some coffee," whatever it is. After a week or two weeks or three weeks, that gets pretty boring. It is not uncommon for people to have a honeymoon with their retirement and then have a depression coming on because they haven't figured out what they're going to do when they get up in the morning.

You need an emotional plan for retirement as well as a financial plan: activities, friends, part-time work, grandchildren, whatever it is. I have a dear friend who retired a year ago, and he says he's failing at retirement because he's so bored. You need an emotional and living plan as well as a financial plan. I think that that's something well worth doing.

Bob Edwards: Steve Vernon suggested that healthcare is a big, often overlooked facet of retirement planning, but there's a lot to consider in healthcare. Where should we start when it comes to planning for healthcare costs?

Jean Setzfand: I think Steve raised all the right points. For those who are pre-Medicare, you really need to think through your healthcare insurance options. Again, for those who are lucky enough to get coverage through their employers, they're in the best shape. For those, shop around. Figure out what plan works for you.

I think, again, his good advice in reminding everybody that, once you hit Medicare, it's not a free ride, quite frankly. There's still a lot of out-of-pocket expenses. One number that I think everybody should wrap their head around more naturally is that, for a 65-year-old couple, they should plan to actually have $250,000 set aside for all these out-of-pocket healthcare medical costs from the point of retirement, 65, through the end of life, and that doesn't cover long-term care.

Bob Edwards: Suze Orman asks that people seriously consider long-term healthcare insurance. When should folks start considering if they want to buy this type of insurance?

Jean Setzfand: I actually want to focus on the last thing that Suze said, which is she talked about considering long-term care insurance products if you're able to pay for it, afford it very easily. I think I want to actually step out of the whole conversation of just the product when you think about long-term care, because I think what she's saying is that some people are able to buy the product and others aren't, whereas this topic, unfortunately, is, again, a universal issue that we all have to deal with.

By the age of 65, 7 out of 10 Americans are going to need some form of long-term care support. The vast majority of us are actually relying on unpaid family caregivers for that support. I think it's really important for you to think through that type of plan, that type of care, and really talk to your family.

If you're in the position of caring for your aging parents, have a conversation with them. For those who are relying on your family members, think about... Absolutely, if you are fortunate enough to have kids to rely on, great, but think about actually forming a team well beyond that. Is there a community or a network of others that you can rely on for more continuity of care so that you're not, again, burdening one individual or even two too much?

I think the broader context is just think through that plan. Again, if you're the caregiver or the care recipient, it's important to have that conversation sooner rather than later. As the caregiver, as you're thinking about it in caring for your loved one, make sure you take care of yourself. It's a big burden that you're taking on. As you're doing it, think about what you want out of your life in the future as well.

I just want to point people's attention to some resources that AARP has on this. If they search AARP Prepare to Care, there's a really long guide to help you think through the conversations, the plans, resources that you can tap into.

Bob Edwards: Well, given the high percentage of us who are going to need long-term care, should we just all automatically get it? I mean I'm not sitting here thinking up ways for insurance companies to make money, but that is a high percentage of us that are going to need it.

Jean Setzfand: Absolutely. There are 40 million family caregivers out there today. I think the system isn't necessarily perfect, and definitely some changes need to happen in order for this to be better structured.

Bob Edwards: Jane Bryant Quinn's advice was interesting. Make sure you're not bored in retirement. What do you think about that?

Jean Setzfand: I love, love, love this piece of advice. I think it is really important for you to have a life plan. Even though we're talking a lot about finances, if you have a clear view of what your retirement life will be, there is definitely a good emotional aspect to it, which is what Jane focused on.

I think she also is recommending it because there's a financial aspect to it too because the more concrete you have plan-wise for your life, you actually know what it takes, what you need in order to fund that. Are you going to actually take a break and have a relatively relaxed life and, therefore, your expense expenses go down? That would be nice to know versus you're going to take a trip around the world. Very different, right, in terms of expense base. The more concrete you have in terms of a life plan once you hit that point of retirement, actually, the better off you'll be from a financial standpoint because you'll know what it takes to actually fund that.

Bob Edwards: I like how she mentioned retirement honeymoon.

Jean Setzfand: Exactly.

Bob Edwards: You have a little fling before you decide.

Jean Setzfand: Actually, that's not a bad idea. You should practice your retirement, at least try it out, see if you like it.

Bob Edwards: Thank you, Jean.

Jean Setzfand: Thank you.

Bob Edwards: For more savings tips, check out the July-August issue of AARP The Bulletin's 99 Great Ways to Save. You can find useful advice for every aspect of life from health, travel, entertainment, credit and loans, shopping, and more. The issue features 50 of the best ideas from years past and includes experts like Bob Vila on home costs and Pauline Frommer on travel.

Thank you to Jean Setzfand for helping us out with these financial planning tips. Visit aarp.org/podcast to listen to Closing the Savings Gap with Jean Chatzky. Be sure to check out The Perfect Scam podcast, which profiles America's biggest scam stories. For more retirement and personal finance help, visit aarp.org/money.

If you fail to plan, you plan to fail. It's especially true for retirement planning. Listen in to get tips from Suze Orman, Jean Chatzky, Jane Bryant Quinn and Steve Vernon on preparing for your financial future.

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