The Money Class (26 page)

Go to The Classroom at
www.suzeorman.com
:

There you’ll find information on how to move your money from a 401(k) to an IRA using the direct rollover method.

LESSON RECAP

Make the commitment to develop a retirement plan in your early years and you will be on your way to a great retirement. I know we have covered a lot of material here, so I want to leave you with a few big-picture goals to focus on:

• Start as soon as possible.
  
• Make it a goal to save 15% of your pre-tax salary.
  
• Always contribute to a 401(k) that offers a matching contribution and make sure you contribute enough to earn the maximum employer match.
  
• Include stock mutual funds in your retirement portfolio.
  
• Contribute to a Roth IRA.
  
• Keep your retirement money growing for retirement. No early withdrawals or loans.
  

CLASS

RETIREMENT PLANNING
FINE-TUNING IT IN YOUR 40S AND 50S

THE TRUTH OF THE MATTER

Your late 40s and your 50s are a critical time for your retirement dreams. Even the most carefully thought out retirement plan likely needs a thorough tune-up as you round the bend of midlife—not only because traditional “retirement age” looms on the horizon, but also because the past few years have thrown a lot of new challenges into our path. Your 401(k) and IRA balances may still be recovering from the recent bear market. The home equity you may have been counting on to fund a large part of your retirement may be well below what you were planning on just five years ago. Or maybe your savings plan was set back due to a job loss in your family.

As unsettling as all of that is, there is still plenty of time to act. The actions and adjustments you make today can have a tremendous impact on the quality of life you will enjoy in retirement. But the reality of this midlife stretch is that it requires an absolutely ruthless truthfulness from you and a resolute determination to be thoroughly candid about your financial situation
today
—not what you had 5 or 10 years ago, but right now. I am asking you to take a deep breath, put your fears and anxiety aside for the moment, make an impeccable personal accounting, and then, with my help, make the smartest choices possible based on your current reality. The biggest mistake you can make at this juncture is to sit tight and not act, hoping, praying that somehow between now and retirement everything will work out for the best. That is not standing in your truth. That’s the opposite. I’m sorry to break it to you: It’s delusional.

I am here to tell you that the choices you make in this decade will have a tremendous impact on whether you will be able to retire with the money and security you desire. It is your willingness to face those decisions today—and adjust your retirement plan as needed—that will allow you a decade from now to look back and say with pride, “I am glad I did,” rather than be filled with the regret of “I wish I hadn’t.” I realize it is easy to be paralyzed by what you think is an insurmountable task, but please listen to me: You are still plenty young and in a position to make sure your retirement dreams can be realized.

Every year the Employee Benefits Research Institute (EBRI) publishes its retirement readiness report; it’s a detailed statistical look at how many of us are on pace to have enough money in retirement to meet our basic living needs. What grabs the headlines is that nearly one-half of us are currently at risk of not having enough in retirement to pay the basic bills such as housing, food, and utility costs, as well as paying for out-of-pocket healthcare expenses not covered by Medicare and private insurance. But here’s what was deeper down in the study: The majority of that group who are at risk are within 20% of having what they need to be okay in retirement. That is, right now they have 80% of the savings and access to retirement income (pensions, Social Security, etc.) that EBRI estimates they will need to support themselves in retirement. Yes, that’s a shortfall, but it’s not nearly as dire as the headlines would suggest. Stand in your truth at this stage in your life and you can surely close a gap of that size.

For those of you who are more than 20% away, now is not the time to give up. I learned a saying from a teacher many years ago that I have often recalled to help me get through tough times in my life, and it goes like this: Be a warrior and don’t turn your back on the battlefield.

Obviously the ability to save more at this juncture is a huge part of the puzzle we need to put together between now and retirement. But it’s far from the only piece on the table. Reducing your expenses before you reach retirement is a very important strategic move that is often overlooked. We think we have to save, and save, and then save even more so we can “afford” to retire, yet we don’t realize that what we need to save is a function of what we expect our expenses to be in retirement. If you can arrange your financial life so you will have lower expenses in retirement, then you don’t need to save as much.

Of course, it is impossible to sit down and do a line-item run-through of what you think your living costs might be 20 or 30 years from now. But there are in fact some obvious big-ticket items we can move off your balance sheet. Pay off your mortgage before you retire and you have just wiped out what for most of us is our largest monthly expense. Another big expense center in your 40s and 50s is college costs. For years I have implored parents not to put paying for college ahead of retirement savings. That’s become even more important today. I am not just talking about redirecting money you wanted to put into a college 529 plan into your own retirement accounts. Parents must also not overburden themselves with loans to pay for their children’s college costs if it means they will still be paying off those loans in retirement. (In the Family Class, I explain a college tuition strategy for parents and children ready to stand in the truth of their New American Dream.)

We also need to embrace the changing nature of what it means to be retired. The classic notion of retirement is that you walked away from your job sometime around age 62–65, never worked another day, and lived for another 10 years or so. But if you retire in your early 60s today, the odds are you will live a lot longer than your grandparents did at the same age. Consider that in 1940 the average life expectancy for a 65-year-old man was just 12 years, meaning that just half of the 65-year-old men in 1940 would still be alive at age 77. Today a 65-year-old man has a life expectancy of 16.7 years. That’s four more years of needing to support yourself in retirement. Women’s life expectancy has increased from 13.4 years to 19 years over the same stretch. Half of today’s 65-year-old women will still be alive into their mid-80s! And I want to make sure you grasp the fact that this means 50% will still be living
past
their mid-80s. In fact, among women who are 85 today, their average life expectancy stretches into their 90s!

In terms of how we view our retirement years, the impact of these numbers is really significant. Because our life expectancy has expanded, we must consider stretching our work years beyond the traditional 62–65 time frame. Unlike past generations of retirees, many of whom could rely on a lifetime pension annuity from their job, most of us retiring in the coming decades will be relying on our own 401(k) and IRA savings. So it’s on us to make the money last longer given the likelihood of our longer life spans.

As I will explain in greater detail in this class, devising a strategy for extending your income-earning years through your 60s will help to ensure that your retirement savings can support you throughout your longer life. Don’t worry, the advice is not that you must keep working 40-plus hours a week at a high-powered job. The goal will be to find some part-time work that can generate enough current income that it enables you to delay when you start drawing money from Social Security and your own retirement savings, or at the very least reduces what you need to spend of your own savings in your early 60s.

Here are some of the actions to take in your 40s and 50s that we’ll cover in great depth in this class:

• Deciding When It Makes Sense to Pay Off Your Mortgage
  
• Have a Realistic Plan for Working Until Age 66–67
  
• Delay Your Social Security Benefit
  
• Estimate Your Retirement Income: How Are You Doing?
  
• Saving More, and Investing Strategies in Your 50s
  
• Plan for Long-Term Care Costs
  

LESSON 1.
DECIDING WHEN IT MAKES SENSE TO PAY OFF YOUR MORTGAGE

Are you surprised that the first lesson is about paying off your mortgage? You probably expected me to jump into a lecture of how you need to really get serious about saving much more in your 401(k) and IRA. There is no question that continuing to build your retirement savings is important—you will surely need that money to support you in retirement. But at the same time thinking about the savings side of the retirement challenge is only half the picture. What about reducing your expenses? If you have lower living expenses in retirement you will need less savings to cover your needs, right?

In terms of your ongoing monthly expenses, your mortgage is probably your biggest bill. A troubling trend is that more people are still paying off their mortgage in their 60s. To be sure, the vast majority of older homeowners in fact are mortgage-free, but between 1999 and 2007 (the latest year data is available) the percentage of people age 65 and older with a mortgage rose from 24% to 32%. And I am concerned that many of you in your 50s today will still be carrying a mortgage into retirement.

Many of you, over the past few years, wanted to take advantage of low interest rates and refinanced from rates above 6.5% to rates around 5% or lower. While that move made sense financially, for many it also reset the clock on your 30-year mortgage, extending your total payback time. Or maybe you traded up during the housing bubble—complete with a new 30-year mortgage. Or perhaps you decided the time was right to take advantage of some of the bargains to be had out there and you became a homeowner for the first time. All these scenarios point up the fact that we now have a generation of 50-somethings who will still be paying off a mortgage well into their 70s or possibly their 80s, if they stick to their current payment schedule. That could create tremendous financial stress if you are living on a fixed income. You may well find yourself struggling to cover your other costs, to say nothing of having the ability to spend money on the things you dreamed your retirement would hold, such as travel and spending time with—and money on—your grandchildren.

Continuing to carry a mortgage once you stop working puts your retirement dream at risk. That is why I am starting this Money Class with a lesson on how to get your mortgage paid off before retirement.

Now, I want to be clear, this strategy only makes sense if you can answer yes to these two essential questions:

• Do you absolutely intend to stay in this house forever?
  If you have any doubts about whether you will continue to live in your house after you retire, I wouldn’t rush to pay off the mortgage.
  
• Can you afford to stay in the house?
  Please stand in the truth here: Even if you pay off the mortgage, will your retirement income be enough to cover property tax, insurance, and maintenance costs? I know it is hard to contemplate moving from a home you love and have put so much into, but what would be even more heartbreaking would be to realize at age 75 or 80 that you really can’t afford the upkeep of your home and then be forced to uproot yourself at a time when moving may be more trying, both physically and emotionally. If your taxes and maintenance costs are eating up a significant portion of your income today, you have to question how you will be able to handle the payments when you retire; unless you have a big inheritance or have been squirreling away tons of money, it’s likely you will have less income in retirement, not more. If that is your truth, please stand tall and be realistic. Rather than worrying about your mortgage in retirement, you should think about downsizing to a less expensive home sooner rather than later. The faster you get into a less expensive living situation, the more time you give yourself to save more because of your reduced expenses.
  

THE BENEFITS OF PAYING OFF YOUR MORTGAGE

If you answered an emphatic
yes
to both of the questions above, then I have to tell you that paying off your mortgage is an especially smart move in today’s investing environment. Right now safe bank and credit union accounts such as certificates of deposit aren’t paying more than 1% or so. If you were to use savings to pay off a mortgage that is costing you 5% or 6% (the mortgage interest rate) you would have just earned a higher return on your money: You wiped out owing that 5% or 6% with money that was sitting around earning just 1%. Now, of course you could also use your bank CD for other investments that you think could earn you 5%, or 6% or even more. But let’s stand in the truth here: There is no investment in today’s market that can give you a risk-free guaranteed 5–6% return. A dividend-paying stock or ETF might earn that much might, but it could also fall in value too, right? There’s no such risk when you pay off your mortgage.

I also need you to tune out any naysayers who tell you it never makes sense to pay off a mortgage ahead of schedule because you will lose the valuable mortgage interest tax deduction. Be smart here: In the early years of a mortgage it is true that the bulk of your monthly mortgage payments go toward paying the interest on your loan, and those interest payments are what is tax-deductible. But as the years go by your payments pay off more principal than interest, so the value of that deduction gets smaller and smaller.

For example, let’s say you are 50 years old and you just bought a home or refinanced with a $200,000 mortgage. Let’s say your interest rate is 4.5% on a 30-year fixed-rate mortgage. That means your monthly payment is $1,013, or $12,156 a year.