10 Steps to Your Ultimate Retirement
Suze Orman maps out all the smart money moves to make now
En español | If I asked you to name your most valuable asset going into retirement, my guess is that you would say your home or your savings. I disagree. Your spirit — your attitude — is the key component in creating your ultimate retirement. And it makes me so sad — and frustrated — that many of you are focused on beating yourself up over mistakes you have made or regrets for what you might have done differently years ago.
It is a waste of time to focus on what you don't have or could have done better. What is in your control is making the most of what you have today and taking the steps to create the future that you want and deserve. If you're able to face the future without fear — if you can face it with the strength and conviction that you can handle whatever comes your way — well, your future will indeed be bright. Being able to envision better things ahead is what makes the so-called golden years truly golden.
To give yourself a life where you are not constantly stressed about money requires making key moves today. Not waiting. Not hoping. Not giving up.
If you are ready to start, I am ready to help. Here are 10 steps you can take, right now, to make your ultimate retirement a reality.
1. Live below your means
So many of you tell me that you wish you could make more progress toward your financial goals — paying down debt, building up savings — but that you simply don't have the money to make it happen. You are so sure there is no way you can create your ultimate retirement.
Again, I disagree. I think you may be able to spend less today to pay for the tomorrow you want.
What I see is that many households allow their spending to veer off to fulfilling wants more than needs. Every time you are considering a new purchase — be it furniture, a cellphone, a computer or a remodeled bathroom — ask yourself if you are paying only what is necessary to meet that need. Is a less expensive option available?
Your goal should be to spend as little as possible to fulfill your needs. Live below your means but within your needs.
When you live below your means but within your needs, you also set yourself up for a less expensive retirement. If you lower your expenses today, you will have fewer expenses to pay for in retirement.
2. Dial back on your wheels
What's sitting in your driveway or garage could explain a lot of your retirement stress. The average monthly payment for a new-car loan issued in late 2019 was $550, and the typical loan runs for nearly six years. Both are financially indefensible, in my opinion. Even worse is borrowing to buy a car, then trading that car in for another one in a few years — rolling over your old loan balance into a new and bigger loan.
That is nuts. If you need a car, spend the least you can for one that's reliable. That means used, not new. Don't you dare start in about new-car reliability; cars today are built to last. A smart move is to purchase a certified pre-owned car at a dealership. A used car that is a few years old — and still in good shape, of course — can cost 40 percent less than the same model that's spanking new.
Aim to drive that car for at least 10 more years. That's how old my car is — or, I should say, our car. My wife, KT, and I have one car. Could we afford two? Yep. But we need only one. I challenge you to think about whether your household could function without one of the cars you have right now. That could free up so much money.
3. Shrink subsidies for adult children …
If you are telling me you don't have money to pay off debts and build up your savings, any support you're providing adult children is an expense you need to rethink. Look, I would never tell you to stop helping a child who is struggling to become independent. But I see a lot of you enabling your children to avoid pushing themselves to self-sufficiency. They're on your cell plan and your health plan. If they live with you, they don't contribute to household expenses.
“Any support you’re providing adult children is an expense you need to rethink.”
You are stuck in what I call the it's-only syndrome: You tell me, “Oh, c'mon, Suze, it's only $100 a month, or $200 a month. What's the big deal?"
Are you kidding me? Save $200 a month in a Roth IRA for the next 15 years and earn a 5 percent annualized return; you will have more than $53,000 you can spend without owing a penny in tax.
For each expense you're helping out with, ask yourself whether you are financing a need or a want. If it is a want, stop your support ASAP. If it is a need, hold your kids to the same test I just laid out for you. Can they (and you) spend less on the need? Then set expectations. Explain that it is your intention that six months from now, they will have their own cell and streaming accounts. If you are helping with rent, consider contributing less every month so your child is independent in a year or so.
4. … and get your parents to open up
If your parents end up needing financial assistance, you will, of course, step in. But what upsets me is that adult children don't have a realistic picture of their parents’ financial situation and then are thrown when they discover — in the heat of an emergency — that their parents are in financial trouble. That's a time when adult children can wind up doing stuff that threatens their own financial security.
I am always hearing some version of, “Oh, I can't talk about money with my parents. They get mad.” Come on! Are you 50 or 60, or 5 or 6? I am not suggesting this is the easiest conversation to start, but it is essential. Adult to adult.
So how can you start it? I always say, “Use Suze Orman as your excuse.” Try this:
"Mom? Dad? I have been reading Suze Orman about the steps I need to take to be financially secure. She wants us to have a conversation about your well-being. This has nothing to do with inheritance. That is so not the issue. But my retirement won't mean much to me if I don't know that you are OK. Do you know how much I worry about you?
"I want to know if your retirement income will be enough to keep supporting you for many more years, or if we might, as a family, think through ways to ensure you have what you need. I also want to know if you have made plans for having someone step in and help you with your finances if the time comes that you can no longer do it. Have you done this? If not, I can help you get started. It's not hard.
"Most important, I want to know if you have any financial worries. I am here to help, the best I can. Out of love. When might be a good time to start talking about some of this?"
5. Think about downsizing
I know that many of you want to stay in your home. It can be wrenching to consider a move if you have had roots in the same house for years, with all the memories that are tied to it. But I ask you to at least open your mind to contemplate a few realities.
Those happy memories are about the people you welcomed into your home and the experiences that took place within it. You can move and still share those memories with your loved ones.
If you are willing to entertain a downsize, consider moving sooner rather than later, if that is practical. Moving to a less expensive home could set off a wonderful cascade of retirement savings: You might have gains from the sale that you could add to your nest egg. You could also reduce your monthly housing costs, including rent or mortgage, property taxes and maintenance — freeing up more for your retirement accounts.
Lowering your housing costs might also enable you to downshift to work that pays you less but that you enjoy more. I think this may be an important ingredient in helping you to work until you are 70.
Finally, the younger you are when you move, the less stressful the move will be, both emotionally and physically.
6. Attack your mortgage
If you are determined to stay put in your current home, I first want you to take a clear-eyed look at whether the ongoing property-tax and maintenance costs will be something you can comfortably afford on your retirement income. If it is already a stretch today, that should be a big red flashing light. Inflation doesn't stop once you are retired. If the rising cost of staying in your home could become a huge pressure point, I hope you will reconsider my earlier downsizing advice.
If you are confident you can afford to stay put, I am a big believer that you should have the mortgage paid off before you retire. Why? Because it is your biggest expense. And because I have yet to have anyone mad at me because I pushed them to retire free of debt. It will make you happier.
Contact your loan servicer and ask for a revised payment schedule to get the mortgage paid off no later than age 65. If you have more than eight months of living costs set aside for emergencies, you might use some of the extra to pay down your mortgage.
I will always prefer that you save as much as possible for retirement, but if you are contributing more than the company match to a workplace retirement plan, consider scaling back your contribution to the point of the match, then using the extra money in your paycheck toward your mortgage payment. Surprised I'm suggesting you cut back on saving? Think about this: Yes, you will be saving less, but you will also be reducing the income you'll need in retirement.
7. Use Roth accounts
If you have done most of your retirement saving in a traditional 401(k) or a traditional IRA, every dollar you withdraw in retirement will be taxed at your ordinary income tax rate. I think you will be so happy in retirement if you have a pot of savings that you can use without owing any taxes. You can create that by putting your new retirement contributions into Roth accounts. With a Roth 401(k) or Roth IRA, you do not get an up-front tax break, but in retirement your withdrawals are 100 percent tax-free if you follow a few simple rules.
Most 401(k) plans now offer a Roth option; if your plan does, every employee is eligible, regardless of income. If your workplace plan doesn't have a Roth option or you don't have a workplace retirement plan, in 2020 you can save up to $7,000 ($6,000 if you're under 50) in a Roth IRA, as long as your modified adjusted gross income is below $124,000 (or below $196,000 if you are married and file a joint tax return). That's about $580 a month. You know where I am headed, right? Please take to heart my advice on living below your means and rightsizing your financial support of adult children. That's money you can save for retirement.
8. Investigate long-term care insurance
Look, I know LTC insurance has a bit of a black eye. Insurers have sprung big premium increases on people who bought policies years ago. But I don't expect that anyone who buys a policy today will face the same steep premium increases. The problem was that prices started out too low. Claims have been waaaay more than what insurers anticipated.
“The most important advice I have is to plan to live a very long life.”
Policies sold today come with more realistic (read more expensive) prices, reducing the likelihood that you will be hit with a large premium increase. These days a generous policy for a couple might cost $5,000 a year. I get it: That's a lot. Over 30 years that would be $150,000 in premiums. Just to be super cautious, let's assume there is a premium hike along the way and your all-in cost hits $200,000 over 30 years. Do you realize that even at today's cost for at-home care, assisted living or nursing home care, you could recoup the cost in just a few years? And you'd better believe that costs for that care will be much higher in 20 or 30 years.
Have I opened your mind a bit on LTC? Then consider purchasing a policy now. The longer you wait to buy, the higher the premiums. And as each year passes, you may develop a preexisting condition that makes it harder, or impossible, to qualify for a policy.
9. Hands off Social Security
OK, my friends, this is a big opportunity to get you to your ultimate retirement — or to blow it. While you are allowed to start receiving your Social Security retirement benefit at age 62, if you wait until 70, you will get a payout that is about 76 percent higher. Guaranteed. You can't get that guaranteed return over eight years from any investment.
Yet I am constantly amazed at how so many of you insist on starting at age 62. I recently counseled a woman who didn't need the income but started at age 62 “just because.” Luckily, she had been receiving benefits for less than a year, so she was able to repay what she had collected and will now wait to get that much-higher age-70 benefit.
“Don’t start with me that you don’t want to leave money on the table.”
I want you to do the same if you are in good health. If you are married, I want the higher earner to wait until age 70; that's how to ensure that the surviving spouse will receive the largest possible benefit. (When a spouse dies, the surviving spouse can collect only one check, not both.)
Don't start with me that you don't want to leave money on the table. There's a good chance you'll be alive in your 90s. Even if you begin receiving Social Security at age 70, when you hit your early 80s your total payments will be more than if you started getting a lower benefit at age 62.
10. Buy some guaranteed income
- 60% of people with annuities are very satisfied with retirement
- 39% of people without annuities are very satisfied with retirement
*Source: Annuities and Retirement Happiness, Towers Watson, 2012. (Respondents’ wealth was $500,000.)
There is no better sleep-at-night, enjoy-your-retirement move than to know you can cover your basic monthly living expenses from income that is guaranteed to land in your bank account every month. Your Social Security benefit is guaranteed income. So is a pension, if you have one. If those guaranteed sources don't cover all your living expenses, I think it can make great sense to use some of your retirement savings to purchase an income annuity.
If you just cringed at the mere mention of an annuity, I am actually thrilled. There are indeed plenty of lousy annuities that make insurance agents a lot of money and are a bad deal for you. I am recommending only one specific type of annuity: a plain vanilla annuity by which, in exchange for paying a premium to an insurer, you can lock in guaranteed monthly income for the rest of your life. You can buy an immediate income annuity with a single lump-sum payment you make right when you are ready to start living off your retirement income. The payout you receive is based on your age, whether benefits will continue for a spouse, and interest rates. To get an estimate of what size premium you would need to generate the guaranteed income you want, go to ImmediateAnnuities.com or IncomeSolutions.com.
While covering your ongoing costs with guaranteed income is a great stress reducer, so is having cash ready to handle whatever comes your way, such as a spike in out-of-pocket medical bills. As you reach retirement, I recommend increasing your emergency fund from eight months to two years of coverage. If you don't have all your living expenses covered by guaranteed income, I would bump this up to a three-year cushion.
What you do with the rest of your savings is a personal choice. The prospect of living into your 90s should be motivation to keep some of your money working (invested) for a future older you. But I also want you to give yourself the freedom to spend extra savings on you, your loved ones or causes you care about.
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