We’re living in frightening, anxiety-provoking times, but we have to be able to hold on tight and weather the financial storm — we want all our listeners to have the knowledge and the confidence they need to make it through this downturn, and the next. A recent survey from Magnify Money showed that nearly 20% of investors would tolerate no more than a 5% market decline before giving up on stocks for retirement, and an additional 33% of investors said they could handle no more than a 10% dip before abandoning stocks… These numbers are so upsetting because when people make changes based on short-term market events, they often lose a lot of money, and don’t get back into the markets in time to catch the rebound.
There is perhaps no better person to sit down with this week to discuss what it means to be a life-long, level-headed, ready-for-retirement investor than Suze Orman. Suze is the author of ten consecutive New York Times bestsellers, she’s a two-time Emmy award-winning television host, and she’s the author of the new book, “The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime.”
Listen in as Jean and Suze dive into all the market worries surrounding coronavirus and the downturn in the markets — how should we be looking at this, and what should we do with our portfolios? Suze offers up her advice for how best to ride things out, and weighs in on when she thinks the market will rebound. She also discusses why she went from having an 8-month cushion in cash to having a 3-5 year cushion in cash, and why you never want to have to draw down on your principal while the market is down.
Suze discusses how where you’re holding your money (in a retirement account or in an investment account) influences the moves you need to make now. She also discusses how to offset your losses at the end of the year, from a tax perspective. The pair also dive into diversification and how it differs in 2020 from what we saw in 2008 — in other words, what moves do we need to make now that we didn’t make 12 years ago?
Suze talks about the safer bet of preferred stocks, specifically dividend-paying stocks where the dividends don’t make up more than 50% of a company’s earnings. She also goes into bonds, high-yield savings accounts, and the danger of getting out of the stock market and not getting reinvested in time to catch the inevitable rebound.
Pulling from her new book, Suze discusses 10 things retirees should keep in mind to make sure they’re using their money in the best way possible, and offers her advice on annuities, as well as the ideal age for women to start taking social security. Here’s the link to Suze’s informative piece on retirement from the AARP Bulletin that she and Jean discuss on-air.
Suze also discusses why she thinks leasing a car is a big waste of money, and why feeling the need to own a “new car” every few years is a big financial mistake. She and jean also talk about the importance of downsizing, and how the more money you save, the more money you have. Because for every $1 you waste now, you’re actually wasting between $3 and $5 because of the compound interest you’re missing out on if you’d invested that money instead.
In Mailbag, Jean and Kathryn talk about the importance of measuring our expectations on the rates of return that we’re going to get from our investments in 2020, 2021 and beyond. Jean discusses the recent market swings due to coronavirus, and what we should actually be buying more of during the downturn. We tackle a question from a listener who’s curious if she should contribute more to her IRA this year since it has experienced a higher rate of return than her 401(k), and we also field a question from a woman worried that she’s not getting the best deal on the managed portfolio fees on her 529 plan. Lastly, we take a question from an anonymous listener who’s curious if she should take a job opportunity in Pittsburgh, or return to Washington, D.C. Then, in Thrive, Jean dishes on what to do if you owe money to Uncle Sam this tax season.
Suze Orman: (00:02)
When you start to really value the things that you have and your money, you don’t make decisions to impress other people you don’t even know or like with money you really don’t have.
Jean Chatzky: (00:18)
HerMoney is supported by Fidelity Investments. We want to inspire you to demand more from your money by first knowing what you own, what you owe, and what you want from your money. We’ll help you reach your financial goals faster. At Fidelity.com/demandmore. HerMoney comes to you through PRX.
Jean Chatzky: (00:36)
Hey everybody, I’m Jean Chatzky. Thank you so much for joining us on HerMoney. I am thrilled to have all of you here today. I’m even more thrilled to have Suze Orman with us today. Suze, of course, needs no introduction, but she’s here because she’s got a brand new book out that we all need. I mean, this is number… Is this number 10 or 11?
Suze Orman: (01:11)
Actually, this is the 11th but it’s the 10th consecutive New York times bestseller.
Jean Chatzky: (01:16)
Amazing, amazing. It’s called The Ultimate Retirement Guide for 50 Plus: Winning Strategies to Make Your Money Last a Lifetime. And it’s your first book really focused on the changing financial needs of people who are looking at retirement, particularly now with the markets so volatile and thinking, what do I do? So I’m so happy you’re here.
Suze Orman: (01:39)
Jean Chatzky: (01:40)
Tell me a little bit about this book and where the desire to write one for this particular audience came from.
Suze Orman: (01:48)
You know, Jean, you yourself just said that this was, you know, my 10th or 11th book and my very first book was called, You’ve Earned It. Don’t Lose It: Mistakes You Can’t Afford To Make When You Retire. But I wrote that book in 1995 and I was essentially 45 years of age back then. Okay. And so here we are and now I’m going to be 69 and it’s very different when you are 69 and you’re facing not only the financial struggles possibly, but also the emotional and psychological struggles of what it means to get older, to write a book for people who are getting older than when you’re 45 writing a book for people who are 65, 70 and 75. So this book brings a total different perspective to it than any other book really I have written, because I retired when I was 65 which was almost four years ago. So all those things of your identifications, of the host of The Suze Orman Show, gone, writing for Oprah, gone. You know all these other things I was doing. I just stopped them all at once.
Jean Chatzky: (03:04)
How was that?
Suze Orman: (03:07)
That was back in, well, it was now almost four years ago, I stopped everything.
Jean Chatzky: (03:12)
But how was that for you? I mean I think about that all the time, right? I think about what happens. Cause I don’t want to work, I want to keep working, but I don’t want to work as much as I’m working forever. And so much of all of our identities I think are tied up in what we do.
Suze Orman: (03:27)
So this book has a lot to do with that as well. But how it was for me was interesting because not only did I stop everything, but I sold five of our homes, all of our cars, I sold everything. KT thought I was having an absolute nervous breakdown and we moved to a private Island in The Bahamas, which we live full time even to this day, which, where I’m talking to you from, so I’m sorry if the connection isn’t fabulous, everybody. But there aren’t communications on this little Island. And so it took a little bit for me to get used to that, but not long cause I found a new passion and that passion was fishing, believe it or not. And I can send you pictures for you to see. But KT and I have now become over all these years, master fisherwomen where we really enter contests and tournaments. And a year or so ago we won the Wahoo tournament here on the Island in The Bahamas, which is a fish that’s like six feet long, swim 60 miles an hour, is the most dangerous fish to catch. If you can catch one. And now we’re master Wahoo fishermen. And everybody doesn’t know me, you know, they don’t call me the money lady anymore. They call me the fishing girl.
Jean Chatzky: (04:43)
Suze Orman: (04:44)
They can call me a fishing girl at this age, I don’t mind. So I found a new passion. We will spend eight to 12 hours a day going fishing.
Jean Chatzky: (04:51)
That’s fantastic. I was out on a fishing charter in Florida about a year ago. We were fishing for mahi. My one and only experience, but boy, it is not easy.
Suze Orman: (05:02)
No it’s not. But we now travel the world to fish in different places everywhere. And what was so fascinating to me is a little bit ago when Oprah was on her Vision 2020 Tour, I joined her in Minnesota and I walked in and this was the first time now I had really been in public and around people who knew me and everything. And 18,000 people went crazy when they saw me. And Jean, you know how it is. People come up, can I have a selfie? And all of a sudden you’re back in that frenzy of quote celebrity. And we were on stage with Oprah and it was so fabulous. And we laughed. And KT said, Suze, do you miss it? And I said, KT, I don’t miss it as much as I do fishing. Cause we hadn’t fished for a week. So I found a new life. But even in finding a new life, you know, I found also my own podcast, the Women and Money podcast. And I love that podcast. And I try to answer almost every single person’s question when they write in and it’s, you know, all these women of all ages. And that’s how this book kind of really did come about. Where women who were 50, 60, 70 writing me saying, Suze, I’m alone now. My husband died, my spouse died, they divorced me, I have to start over. Can you help me? So there’s an entire group of women, and the men smart enough to listen by the way, who are looking for guidance. And now I can guide them because, not only of my financial knowledge, but really Jean because of how old I am. Because that brings a whole different perspective.
Jean Chatzky: (06:43)
I love how much you’ve embraced that. I also think that being in retirement gives you a perspective that we all really need right now because the markets have been up and down and up and down. We’re dealing with Coronavirus. There is so much uncertainty and our audience, we know we’ve got, one third millennials, we’ve got one third Xers, but we’ve also got one third boomers and and the closer you are to retirement, the bigger the risk this sort of volatility presents. So what are you telling people to do right now with their portfolios? How do we look at this?
Suze Orman: (07:26)
Well, the way that I’ve always told people is that if you really need money within three to five years, that money never belonged in the stock market per se. It just didn’t. But let’s just say that you’re there now and you didn’t get out or whatever it is. This is the type of market that you need to ride out and you just are going to have to ride it out at this point for possibly this entire year. I do think that we’ll see it return again in probably two to three years. You should be okay. But that’s why, you know, I’ve switched. I was on a few shows a week or two ago and they read the book and the host would say, Suze, you’ve gone from eight months of an emergency fund to almost three years. Why? And so what I’m suggesting for everybody right now is that when you do go into retirement, that you have a three year cushion in cash. And the reason that you want that cushion is because you don’t want to sell when the markets are going down. And if you have to take money out of a retirement account while money is going down to live on, you’re taking out more than the 3 or 4% at max that you should be taking out because your principal is decreasing. So if you could just have cash to cushion yourself to get through it, because you know, in the last years, a bear market from where it goes from the top to the bottom, back to the top again is usually 3.1 years. And that’s why I decided on three years. But right now you’ve just got to really, really stay the course here.
Jean Chatzky: (09:10)
Even if you have money that you’ve been investing over the past decades and you’ve made money overall, you should still hold on. You don’t want to be selling on an up day. Is that what I’m hearing you say?
Suze Orman: (09:23)
Well, at this point now, a week or two ago, I would have told you something different. But now that we’ve essentially kind of gone down almost 20%. Now the other thing you have to consider is this. Where are you holding that money? Is that money in a retirement account or is that money in an investment account? Because if you have tremendous gains and you sell now and it’s not in a retirement account, then you’re going to lose a good percentage of that to capital gains. And so is that another 25, 30% for you? Depending on your income, it might be nothing because you don’t have any income. So it just depends on your tax bracket. But you always have to take that into consideration for money outside of a retirement account. Now, if you have money outside of a retirement account, and this is scaring you to death and you have tremendous gains, or still you’re up from where you originally were, and you also have losses, you might want to look at some offsetting where you sell your losses against your gains. So at least you’re coming out without any tax ramifications. Inside a retirement account, that’s a whole different story. If you have tremendous gains and you just are going crazy and it’s getting to you, all right, you can come out. But Jean, we’re back where we were in 2007, 2008 and those people who came out of the stock market, they felt good for about a year, but they never got back in. And then they missed the greatest 10 years because the last 10 years have averaged about 14% in returns per year.
Jean Chatzky: (11:18)
Yeah it’s been incredible.
Suze Orman: (11:19)
And so, but they missed that. So I’m really hesitant to say to people, get out now, when we’ve already decreased by almost 20% at this point. Could it go a lot further down? You betcha it could. But if you’re in good quality stocks, I’m telling people right now that I would be picking what I wanted to buy and on down days, on really down days, I would dollar cost average into this market with tiny amounts of money.
Jean Chatzky: (11:50)
Let’s talk about where to put that money. Does diversification look different in 2020 than it looked in 2008?
Suze Orman: (12:00)
Yeah, because in 2008, you still had interest rates that were high enough that you could go in and lock in some good yields and be safe and be sound there. You could buy municipal bonds, you could do all of that. Those were the years, in 2006, 2007, I put 90% of my portfolio into municipal bonds and everybody thought I was crazy at that time. Even as far back as September of last year, I was telling everybody on the podcast to please buy, you know the Women and Money podcast, 30 year treasury bonds for 2.2%. And I was telling them to do that, which I myself did, because if interest rates went down just 1%, they would go up 15 or 18%. And that’s exactly what happened. Today with interest rates essentially with bonds at zero, they’re going to go to zero. It’s obvious. You’ve just had, you know, England cut, they’re going to cut. And when interest rates are at zero, it’s why even bother buying a bond at that point. You know you have no upside potential at all any more in my opinion. So you’re far better off for safe money to go into a high yielding savings account or something where you have liquidity. You don’t have to be locked in at all. You know, you don’t have to worry about what the markets are doing. Are you going to sell on the market or not with your bonds? So diversification today looks different in that I think bonds are out of the equation if you have new money to commit. And so where do you go with that money? You know, you really have very little choice if you want to make anything above one or 2%. You also obviously could go in the market and if you can pick some good dividend paying stocks that, you know, where their dividend, it doesn’t make more than 50% of their earnings and they have cash, then you’d probably would be safe there. And you could dollar cost average into those if you want. A little bit ago, I was saying preferred stocks are where people should be going because they have absolutely stayed steady in this decline, but you know that always won’t be true. So you just, it’s a very difficult thing today for diversification. Far more difficult than just 60% in the stock market, 40% in bonds. It’s very difficult right now.
Jean Chatzky: (14:23)
You mentioned high interest rate savings accounts. We have a list of those on HerMoney.com so if anybody is looking for the best in high interest rate savings accounts, you can go there and you can find it.
Suze Orman: (14:33)
What are you finding that they’re paying you though?
Jean Chatzky: (14:35)
Well, they’re not paying much anymore. They’re paying, you know, a percentage, maybe a percentage and a half, but at least it’s better than 0.1% right. And we’ll save. We do the best we can. I’m with you in this environment. I want to talk about the concept though of guaranteed income. I picked up my AARP bulletin because I am 55 years old. We’re going to embrace our age on the podcast today. And so I’ve been getting AARP magazine and the bulletin and working with them for a long time. I picked up my bulletin, your lovely faces is on the cover and you talk about 10 different things that retirees should be keeping in mind to make sure that they are using their money in the best way possible. Let me get to a few of those, but before I do that, I also want to remind everybody that HerMoney is brought to you by Fidelity Investments. You don’t have to know all the answers when it comes to your financial future. But an important question to ask yourself is what do you want from your money? What are your financial goals? No matter where we are meeting you on your financial journey, Fidelity’s here to help you reach those goals faster. It all starts with a financial checkup and an understanding of what you own and what you owe. And from there the folks at Fidelity can work with you to evaluate your investment options and different ways to grow your savings. Discuss your goals, see where you stand, get help taking the next steps at Fidelity.com/demandmore. We are talking with Suze Orman from her private Island in The Bahamas. She is the author of 11 now consecutive New York times bestsellers, the two-time Emmy award winning television host, the author of the new book, The Ultimate Retirement Guide for 50+ and as we’ve learned this morning, the champion fisherwoman. So from this article, Suze, I pulled a list of a few things that I wanted to touch on based on your advice in this book and the advice that you’re giving to people who are in or entering retirement. One was that you should consider using some of the money in your stash to buy yourself some guaranteed income, guaranteed lifetime income. Talk about that because I know you, like a lot of people, have sort of turned the tables on this.
Suze Orman: (17:02)
You know, it’s no secret that Suze Orman is, in most cases, hates annuities, hates things like that. Right? But really, the only investment in terms of an annuity that I really don’t like are variable annuities. I’ve never liked them. I’m never going to like them, but that’s besides the point. There are other annuities that make sense. I learned a lesson a little bit ago that made a lot of sense. It went like this. There was a woman named Judy. She was in her seventies. This is from my podcast. You know, this was about two years ago, maybe two and a half years ago. She said, Suze, I’m in my seventies I have $400,000 to my name. I’m getting social security and I need 2000 more dollars to make my life work. I am not married, I don’t have kids. I don’t have anybody to leave any money for. Can you help me? And so we took 200,000 of the 400,000 that she had. You know, I told her, I want you to go and shop for an immediate annuity. And so she did. And she was able to lock in for herself, $2,100 a month every month for the rest of her life and still had $200,000 to invest in the market at that time. That gave her the money and the peace of mind for her to do everything she needed to do while the other $200,000 grew over these past few years as well. And so what was interesting about that, I was like, oh my God, she was happy. She felt secure. It was the only place that she could get $2,100 a month on a $200,000 investment even then because interest rates were low. But I now really think that it is important that people know that they have their monthly expenses covered by guaranteed income because today Jean, as you know, most people aren’t getting a pension anymore, although some very lucky ones still are. And most people are only guaranteed income from their social security cause the other thing that I say in that article is I really do want everybody to work until they’re 70 or at least not take social security until you are 70, because if you simply wait from the year 62 which I know everybody, as soon as they turn 62 they’re like, I’m going to take social security. If you just wait from 62 all the way till 70 you will get 76% more. That is a lot of money. That is a lot of money and so I want people to wait until they’re 70 to take that. And preferably again, not touch your retirement accounts until you are 70. Cause then you really will have more time for compounding. But I really now am encouraging people because I see that they’re not able to make their bills and they’re taking more money out of their retirement accounts and everybody knew that eventually these markets would have to blow. They couldn’t just go straight up. That’s not how it works. And so a guaranteed income where you know that you don’t have to worry about the market, you can’t get interest rates anywhere else. If you could have that source of income then at least you have that security under you. So I have changed on that. So for some people it works. For others, this is not a solution for everybody cause maybe they have a spouse, maybe they have kids, who knows their situation. But it might be something everyone at least should consider.
Jean Chatzky: (20:38)
Yeah and there’s some good research on that. The Alliance for Lifetime Income has done some studies and they put some data behind what you just said, that people who enough guaranteed income for life to cover what they call your mug, your mortgage, utilities, groceries, I throw healthcare in there, are happier. They, they are just less stressed and they sleep better. And I think there’s great, great value in that. Talk to me about the car in your driveway. I thought the analysis that you did about a car and how much money you can save by just keeping your car longer. And by the way, this is not just for people in retirement. I just made an appointment to take my six year old Volvo into the dealership tomorrow cause the radio is on the fritz or the communication center, whatever they want to call it, is on the fritz. But believe me, I’m keeping this car until it drops.
Suze Orman: (21:31)
Yeahh, like even myself, our car now is almost 10 years old and obviously I can afford a new car, but why would I want to waste money like that? Just because you have money doesn’t mean you should waste money. You should never waste money. I love my car and somehow we all rationalize in our head, well, I’m going to spend $2,000 to fix it up so I’m going to sell it instead and I’m going to buy a new car and I’m going to finance it and I’m going to be spending $400 or $500 a month every month or whatever it is for the next five years. Are you just kidding me everybody? When you start to really value the things that you have and your money, you don’t make decisions to impress other people you don’t even know or like with money you really don’t have. And you start to really put value on all the years that you’ve worked to create all these things. You just keep them. We are wasting so much money. How many people do you know Jean, that every three years, they get a new car? They don’t even own that car. They lease a car. I hate leasing. Leasing is the biggest waste of money, in my opinion bar none. So if you’re struggling for money, if you don’t really have enough, can you just start looking at your lives? And this is for all three of your demographics that listen to your podcast. Can you just start looking at your life, about how much money you are wasting simply for the pleasure of saying, oh, I’m young, I deserve this. I’ve worked so hard. No. The time that you want this money is later on in life. And for every dollar you waste, you’re not wasting a dollar. You’re wasting three, four or $5 because the compounding effect of that money later on. So Yeah, I have a thing about not waiting to get older to downsize the home that you’re in.
Jean Chatzky: (23:31)
I’m with you.
Suze Orman: (23:31)
All these parents that keep their homes, their kids go to college and they keep these homes so that their kids, when they’re done can come and spend one week with them a year in their own bedroom. Oh, please. It’s like, can you just, the sooner you can downsize in your home, the more money you save, the more money you save, the more money you have, the less you actually need in your retirement accounts to pay bills that are just unnecessary. So there’s a lot of ways that people waste money that they really can’t afford to.
Jean Chatzky: (24:05)
Plus it is so much more stressful to live in a big place with a ton of stuff. I mean, it’s just getting rid of stuff. And I’m going through this right now. My husband and I bought an apartment in Philadelphia. We’re selling our house, which is smaller than the house that I lived in before I was divorced. And so this is my second round of downsizing. But I’m so excited about getting rid of stuff. It’s a little stressful, but it’s incredibly gratifying.
Suze Orman: (24:35)
You’ll love it. I promise you. You know, KT and I, over 20 years when we were living in the States, we never had a place that was bigger than 1800 square feet ever, ever. And you know, right now on the Island, we have a bigger home here. But that’s because we’re planning for our old age where KT’s sisters will come live with us here as we get older, cause it’s cheaper to live and do that in one house than any of us ending up in a nursing home. And that’s the way that I think. I’m like, okay, how do we live a life that we love and also make it so that we can, you know, make sure everybody can afford it and that her sisters are okay and that there’s a family compound so that the family can take care of one another. So I also think it’s important that we go back, you know, to the nuclear family as to how do we take care of one another. Not just financially but emotionally so that we all don’t end up separated and in nursing homes and all these things that tend to happen.
Jean Chatzky: (25:40)
Suze, you know, I’ve known you for many years. I don’t think I’ve ever heard you sound happier.
Suze Orman: (25:45)
I can tell you I have never been happier. And you know, many people are asking me lately as I’ve been interviewing and out in public again, why are you so happy? And the answer to that question is, I don’t do anything I don’t want to do. And the goal of the book, The Ultimate Retirement Guide is that to live your ultimate retirement, I want all of you to live a life that you don’t do anything you don’t want to do. Cause to our lifetime Jean, how many of us have done things we really didn’t want to do? You don’t really want to get up at four o’clock every morning to go do this, but okay, you do it. You don’t want to do this job, you don’t want to do that job, but that’s where your income is coming from. We have to go from a life of not wanting to do things, to never doing anything we don’t want to do again and that’s the goal of, retirement. That’s the goal.
Jean Chatzky: (26:45)
Suze Orman, I hope everybody picks up your new book. Thank you so much for spending this time with us today. It’s a treat to talk to you and please tell KT hello. Give her a hug. Once we go back to hugging give her a hug for me.
Suze Orman: (27:03)
I’ll give her an elbow bump.
Jean Chatzky: (27:05)
There you go. Fist pump, something like that.
Suze Orman: (27:08)
Alright. Thank you for having on Jean. It’s an honor.
Jean Chatzky: (27:11)
Thank you so much and we’ll be right back with Kathryn and your mailbag.
Jean Chatzky: (27:21)
And Kathryn Tuggle from HerMoney.com has joined me in the studio. Hey Kathryn.
Kathryn Tuggle: (27:28)
Jean Chatzky: (27:29)
Suze was delightful.
Kathryn Tuggle: (27:31)
Love her. I love what she says and I love how she says it. She has such a reassuring tone to her voice.
Jean Chatzky: (27:37)
She really does. She really does. I wonder if that’s the secret of her success.
Kathryn Tuggle: (27:41)
It’s gotta be part of it. Everything she said, I was like, yes, you’re so right Suze. Tell me more.
Jean Chatzky: (27:48)
I also think the fishing is really interesting. She did a story for Money magazine right after she retired, when Money was still coming out in print, about her retirement. And that was the first time that I realized that she was spending large chunks of her time, she and KT, fishing and I thought, I was just fascinated actually, because you wonder what you’re going to do with your next phase.
Kathryn Tuggle: (28:10)
Jean Chatzky: (28:10)
I mean, you know, everybody gets one these days. It seems like people get one these days and you want to do something that you really love and enjoy. And I don’t know what that is for me yet. And so when I look at people like my mom and my stepdad who paint and take painting classes and have covered the walls of their apartment with their own art and Suze who’s fishing, I’m just like, what is that going to be for me?
Kathryn Tuggle: (28:39)
So that is their passion. The painting for your mom.
Jean Chatzky: (28:42)
For my mom and for Bob, that’s more for him, I think, than for her. But she really enjoys it.
Kathryn Tuggle: (28:50)
I always feel like it’s something you least expect. Right? Like I don’t think that Suze would have said, I’m going to be a fisherwoman.
Jean Chatzky: (28:58)
Kathryn Tuggle: (28:58)
And I don’t know that your mom would have said, I’m going to be an artist.
Jean Chatzky: (29:01)
I don’t think so. I don’t think my mom would be as into her art if she weren’t married to Bob because Bob’s really into it and taking classes is something that they do together. But yeah. What do you think it’s going to be for you? I mean, you’re, you’re further away from it than I am by many, many years. Let’s just say. Do you think about that at all?
Kathryn Tuggle: (29:25)
It’s a great question. I feel like in retirement, I’ll probably split time between New York and Alabama. My family home in Alabama is just so lovely out on a river and it’s such a nice respite from the city. So I don’t know.
Jean Chatzky: (29:42)
Kathryn Tuggle: (29:42)
I don’t know.
Jean Chatzky: (29:43)
Yeah. But I was thinking, gosh, I mean she really did sound incredibly happy and relaxed in a way that I haven’t heard her sound. So happy and relaxed.
Kathryn Tuggle: (29:56)
She did sound relaxed and when I was setting up the interview with KT, they were like, oh, we’re going to be in The Bahamas. You know, we’re going to be coming to you remotely cause we’re going to be down there for several weeks. And I was like, oh that sounds amazing.
Jean Chatzky: (30:07)
It does. It does. It sounds great. And she does look amazing. I mean she said she’s 69. I did not realize that she was 69.
Kathryn Tuggle: (30:16)
Jean Chatzky: (30:16)
She looks good. The other thing that we didn’t get to that came up in that AARP story, which I do think is required reading and you can get the AARP bulletin stories online so people should go ahead and pull that up. We’ll post a link to it too in the show notes. But she talked about paying off the mortgage before you retire. And that is a question I get asked all the time because, especially now with interest rates so low, mortgages are cheap money. But knowing that your mortgage is covered when your income stops coming in at the level it was, is such a sanity preserving measure that I am all for it.
Kathryn Tuggle: (31:03)
Right. It’s so true. You can’t put a price on that level of peace of mind.
Jean Chatzky: (31:08)
Yeah. And knowing that if you need to sell it, you can sell it. You can downsize. It is a supplemental savings account, but you’ve got this roof over your head. And I don’t think we can underestimate the value of that.
Kathryn Tuggle: (31:22)
Right. I also think that that is what people think of when they think of their retirement. They think of having everything paid off. They think of having their accounts to draw down from and really being set. Right? And I think when your house is paid off, there’s just a level of comfort that comes with that.
Jean Chatzky: (31:41)
Yeah. Even if you’re continuing to earn some money, as many retirees are. Alright, we’ve got questions from our mailbag.
Kathryn Tuggle: (31:49)
We sure do.
Jean Chatzky: (31:49)
And I just want to say, I know a lot of you have questions about the market. I hope that this show has answered them. We will continue to make sure that we surface those questions to the top and that we deal with them because this show is a place that you should be able to come and should make you feel calmer during times of chaos.
Kathryn Tuggle: (32:10)
Absolutely. Our first question comes to us from Sandra. She writes, I have a question regarding retirement savings. My Fidelity 401k had a rate of return of 13.02% this year and a three year average of 10.61%. Meanwhile, my Fidelity IRA earned an incredible 33% this year and has a three year average of 21.19%. Right now I contribute 11% of my income into my 401k and get a 4% company match. I contribute far less to my IRA with no company match, but since it has a much higher rate of return, I’m wondering if it would make the most sense to put less money into my 401k and double up on what I’m contributing to my IRA. Please let me know your thoughts.
Jean Chatzky: (32:52)
So Sandra, you wrote this letter, I am guessing before the markets took their downward turn, what’s happening in your 401k and your IRA doesn’t have anything to do with the accounts themselves. It has to do with the investments that you have purchased in the accounts. My guess is that the money in your 401k has likely been automatically invested for you in a target date fund, and that the money in your IRA is in some sort of broad based stock index fund, an S&P 500 fund, for example. I’m also guessing that the money in your 401k has lost substantially less over the past couple of weeks than the money in your IRA. Those are just suppositions. But the way to deal with this is not by contributing less to your 401k. The only guaranteed return on your money that you’re getting is those matching dollars. And so you want to make sure you are contributing enough to your 401k to get every single matching dollar that you possibly can. If you’re not maxing out on the 401k and the matching dollars, I would heavy up in that account rather than in the IRA. If you are contributing the max to your 401k of what you’re allowed to put in, although it doesn’t sound like you are, putting money into your IRA is a fine thing to do. But look at your investment mix, and take a look at your investment mix based on what makes sense for your age and your tolerance to risk. You don’t tell us how old you are and so I can’t really give you any guidance there, but I am a fan of making sure that you’re not taking too much risk and using tools like target date funds to keep you on the right path. So I hope that that’s helpful. I also know that you have the ability to, for free, pick up the phone and talk to an advisor at Fidelity. I think you should do that regarding the mix in all of your plans.
Kathryn Tuggle: (35:12)
Right. And what about the rate of return she’s getting? Should she measure her expectations in the coming months? Because it seems like pretty substantial rates of return.
Jean Chatzky: (35:23)
We all got pretty substantial rates of return last year. The S&P 500 was up 30% last year. So if all you did was put your money into an S&P 500 index fund, that’s what you got because the costs on that are negligible. And that’s not something that we should expect year in and year out. If we look back, historically the Dow and the S&P have returned closer to eight to 10% since their inception. One’s a little higher than the other and I’m forgetting which one is a little higher than the other right now. I think the Dow is a little higher than the S&P, but we shouldn’t be benchmarking anything against these 30% returns.
Kathryn Tuggle: (36:11)
Jean Chatzky: (36:12)
The fact that the markets are down so much now, or at least they were when we were taping this, has absolutely everything to do with the fact that they were up 30% last year. Things just don’t keep going up. And we are at the tail end, it looks like, of the longest bull market in history. I wrote a newsletter a couple of weeks ago when we first started to see the effects of coronavirus trickling into the market. And if you guys don’t get our newsletters, you should get them again. They are free and you can sign up hermoney.com. But I think the first couple of lines were, you knew this was gonna happen. We all knew this was gonna happen. We just didn’t know when it was going to happen. Markets don’t go up, up, up. They go up and they go down and they go up and they go down. And historically they go up longterm. Over time historically, markets have gone up. But every once in a while you gotta get a pullback and you got to think about it as, this is an opportunity for me to buy more shares of my stocks or my mutual funds or my index funds at a lower price.
Kathryn Tuggle: (37:26)
Yep. Buy low sell high. Our next question comes to us from Rachel in Texas. She writes hi Jean. My husband and I are loose adopters of the fire movement and working to clean up our accounts and expenditures. I handle the checking accounts and bill pay while my husband oversees our investments with much success. We discuss both sides routinely and are generally on the same page. When each of my three children were born, I opened a 529 account and their names and have been contributing monthly ever since. They’re three, six and eight years old. My question is regarding the associated management fees of the 529. My current account states no account service fee. The Schwab 529 plan has no account service fee or enrollment fee. Other account fees, fund expenses, brokerage commissions and service fees may apply. Portfolio fee. The portfolio fee includes a program management fee plus underlying fund expenses. The annual total portfolio fees for the Schwab 529 plan range from 0.25% to 1% depending on the investment you select. Is there an account with similar tax benefits where my husband could manage the investments while avoiding managed portfolio fees and I can continue the easy automatic monthly transfers from our checking account. This 529 is strongly recommended and feels so safe and protected, but am I just falling prey to good marketing tactics? I appreciate your guidance on this topic and all of your podcasts.
Jean Chatzky: (38:52)
Thanks so much Rachel and good for you for contributing to these accounts for your kids. I know I’ve said before, but that’s how I funded college for my kids using contributions to our New York state plan. The deal is essentially, it is very hard to do what you are asking to do and still put money into a 529 account. The other education savings account that allows money to grow tax free is called a Coverdell education savings account, but you can’t put as much money into those accounts per year as you can put into a 529. Contributions are capped at 2000 a year. And so depending on the amount of money that you’re putting in, a 529 may work better for you. Additionally, I don’t know what state you’re in, but many 529s have state tax benefits or other benefits that can offset some of these fees. New York for example, allows a state tax deduction on up to $5,000 of contributions. So you gotta look at your state’s plan. What you may find interesting though is that language that says that there is a different fee structure depending on the investments that you choose. There’s a website called saving for college.com and they do a study of fees on 529 plans. And if you Google that, you’ll come up with a nice chart that looks at the different fees of the different investment options. And they’re all over the map. I mean they really range from on the low side, just a couple hundred dollars or less based on a $10,000 investment over 10 years and, on the high side, closer to $1,000. So it can be pretty significant and you may, if you live in a state where you don’t get any state tax benefits, want to transfer those 529 funds to a good performing program where the fee structure is a little bit lower. I might take a look at New York. New York has a very low fee structure. I might take a look at Utah, also a very, very low fee structure, but go look at this chart yourself. You’ll dig into it. You’ll figure it out. The other thing that I do want to say though is, especially if you think about just moving those investment options into the part of the portfolio that’s only charging 25 basis points, that’s very, very reasonable, and so I wouldn’t worry too much about that.
Kathryn Tuggle: (41:38)
Great advice. Our last question comes to us from an anonymous listener. She writes, dear Jean and Kathryn, thank you for your amazing podcast every week. Love them very much.
Jean Chatzky: (41:48)
Kathryn Tuggle: (41:48)
I have a question about relocation and job opportunities. My husband and I are both 39 years old. We have two kids who are eight and three years old. We used to live in the Washington DC area and moved to Pittsburgh in 2018 for me to attend grad school. While I went to school, my husband continued to work remotely for his company in DC. Now it’s time for us to decide whether to stay in Pittsburgh or go back to DC. I have a job offer, but my position can be based in either location. In terms of the cost of buying a home. Pittsburgh is reasonable and DC is expensive. We don’t have much in savings right now and we have student loans of $30,000. We have no credit card debt, emergency savings of $10,000 and investments of $20,000. Could you please advise us on how to think about location choices? For a family of four, how do we optimize savings and our financial goals versus job opportunities? Thank you.
Jean Chatzky: (42:40)
Well, first of all, congratulations on all the job offers. It sounds like job offers are just coming out of the woodwork for you and your family. It seems to me that you guys have the opportunity to get DC salaries and continue to live in Pittsburgh. I mean that’s kind of what it sounds like reading between the lines that your husband is working remotely for his company, which is based in DC, which means he’s getting a DC salary and you can have your position in either location. I vote for Pittsburgh, I mean, and not just because I really like Pittsburgh. I grew up in Wheeling, West Virginia, which is a stone’s throw from Pittsburgh, and if you do decide to stay in Pittsburgh or even if you decide to leave, I hope that you’ll take a weekend and you’ll take the kids and you’ll put them in the car and you’ll go trek up to Oglebay Park in Wheeling, West Virginia in the spring, which is just a beautiful, beautiful place for a nice day. You can visit the Good Zoo and all the other things that they have at Oglebay and, I don’t know, I’m leaning toward Pittsburgh. My family moved around a lot when I was growing up and we lived in a lot of places with a reasonable cost of living. It just allowed my parents to do more things because they weren’t sinking so much into a place for us to live into the house itself.
Kathryn Tuggle: (44:02)
Jean Chatzky: (44:02)
So I vote Pittsburgh. What about you?
Kathryn Tuggle: (44:05)
Well, I did a quick Google while you were talking to see if remote work salaries are possibly lower. Anecdotally, this is what I’ve heard from some of my friends, that they do take a slightly lower salary in order to have that level of flexibility and companies know that if someone is working remotely, maybe they are willing to take a lower salary for that flexibility.
Jean Chatzky: (44:27)
Kathryn Tuggle: (44:28)
But I couldn’t find any stats on that in the 30 seconds that I spent Googling. But I don’t know. I mean I hear you. If they are making DC level salaries, then I would totally stay in Pittsburgh and just bank the difference.
Jean Chatzky: (44:43)
The other question, and you don’t really get into it, is where do you want to live? You know, you don’t say if you have family in DC. That’s an important thing.
Kathryn Tuggle: (44:54)
Very. Particularly if that family can help you save on childcare expenses.
Jean Chatzky: (44:58)
Exactly. But one more, comparing things like schools. Pittsburgh’s got good ones. You know, DC, I have heard of a lot of people who end up in the private school system. So it really depends on where in DC you’re going to live. If you’re in the suburbs, you may end up in the public school system or, you know, it depends on your choices. Medical care is great in both locations.
Kathryn Tuggle: (45:20)
Jean Chatzky: (45:21)
Culture is fabulous in both locations.
Kathryn Tuggle: (45:25)
And from a cost standpoint, just off the top of my head, if you are working remotely, you’re going to save on commuting costs and possibly wardrobing costs and lunches out. So there’s those budget line items to consider as well.
Jean Chatzky: (45:40)
That typing that you hear is me Googling the cost of living in Pittsburgh versus DC. The median cost of a home in Pittsburgh is $143,000. In DC it’s $556.
Kathryn Tuggle: (45:52)
Wow. That’s a huge difference.
Jean Chatzky: (45:54)
That’s a huge, huge difference. Transportation is more expensive. Miscellaneous is more expensive. Food and groceries are more expensive and Pittsburgh is up and coming. Go to Primanti brothers and have one of those sandwiches with the French fries on it or me.
Kathryn Tuggle: (46:11)
Jean Chatzky: (46:11)
Alright. Thank you so much for the letter. Let us know what you decide. I like questions like this that allow us to sort of dig into the weeds. We are closing in on tax day here and in today’s Thrive segment, let’s talk about the fact that many of us may be preparing to hand over a sizable sum to the IRS. Despite our best efforts, it can sometimes be unexpected news when we owe money. If you don’t have the money to pay your tax bill in full, all is not lost. You do have options and they are as follows. You can apply for an extension. If you can get the money together in 120 days, apply for the 120 day extension. There is no application fee, but you will have to pay interest and penalties. However, the interest in penalties will be at a much lower rate than an installment plan and will cost you far less than what you’d be charged if you simply don’t pay at all. Number two, you can set up an installment plan. You’ll pay a setup fee of 30 to $150 depending on whether you choose to set up automatic transfers from a debit account or not. And finally you can negotiate a compromise. If an extension or installments won’t work for you, you can apply for what’s called an offer in compromise, so you can settle your tax bill for less than you actually owe. Offers in compromise are based on financial hardship and the IRS looks at your ability to pay, your income, your expenses, and the amount of equity you have in your assets. To get to the point where you can negotiate a compromise, you’ll have to pay a $186 application fee. Thank you so much everyone for joining me today on HerMoney. Thanks to Suze Orman for her wonderful insight and for dishing on all the details of her new book. We love having her here. If you like what you hear, I hope that you’ll subscribe to our show at Apple Podcasts. Leave us a review. We love hearing what you think. We want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Video Helper and our show comes to you through PRX. Tune in next week when we’ll sit down with Janice Kaplan, author of The Genius of Women for a wonderful conversation. Thanks so much for listening everybody. We’ll talk soon.