In times of hardship, personal finance expert Suze Orman will be the first to tell you that what you don't do with your money may be even more important than what you do with it.
The host of the Women & Money Podcast says that tapping into your retirement fund to cover with short-term problems is something many will come to regret once they leave the workforce.
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“If you can't pay your bills while you have a paycheck coming in, how are you going to pay for those exact same bills later on in life when you no longer have a paycheck coming in?” she told Moneywise in an interview.
“That is for when you retire. We're living longer right now. So that retirement account has to be bigger.”
Here are five of her top tips to protect your retirement nest egg and live comfortably in your golden years.
1. Don't touch your 401(k) or miss out on employer matching
If your employer offers a 401(k)matching program, be sure to max out your contribution plan every year — it’s as close as you can get to free money.
Orman says the typical plans have employer kick in 50 cents for every dollar you contribute, up to 6% of your salary.
"Under those terms, if the employee contributed $3,000, the employer would kick in another $1,500," she says on Oprah.com. "Hello! That's a guaranteed 50% return on your investment."
With inflation still high and many Americans' budgets falling short, you might be tempted to borrow money from your 401(k). But Orman says this is one account you shouldn't touch.
Not only does it put your retirement at risk, but it can leave you vulnerable if you ever need to declare bankruptcy, says Orman. That’s because 401(k) accounts are protected against bankruptcy and can’t be touched if you ever need to declare it.
“So if you are really in a horrific situation, and you have all this debt, you're underwater with everything, and you need to claim bankruptcy to get rid of that, you still have your retirement accounts." Orman says.
2. Don’t retire owing money on your home
A survey from mortgage banker American Financing found that 44% of Americans in their 60s and 70s are still paying off a mortgage. And 17% said they don’t expect to ever pay it off.
“This is so not OK,” Orman has blogged.
She urges people to go into retirement mortgage-free, for two reasons: to stretch their retirement savings and to rid themselves of debt — an albatross that affects even mental health.
“If you’re going to stay living in that house for the rest of your life, pay off that mortgage as soon as you possibly can,” Orman once told CNBC.
Without a mortgage, you'll have more financial security in retirement, she says. So work until you're 70, use excess emergency savings and do whatever else it takes to get that house paid off.
3. Don't retire too early
During an episode of the podcast Afford Anything, Orman was asked what she thought of the FIRE movement. That's FIRE as in "financial independence, retire early."
Her blunt response — “I hate it. I hate it. I hate it. I hate it." — set off a firestorm among the FIRE faithful at the time.
But she explained that it would take a lot of money to make retirement work at, say, age 35.
"You need at least $5 million, or $6 million," she said. "Really, you might need $10 million." In her opinion, anything less wouldn't offer you enough protection from a potential financial catastrophe, like an expensive illness.
"You will get burned if you play with FIRE," Orman told her interviewer.
As she wryly reminded her followers in a June 2022 blog post, there are “no loans for retirement.” And the sooner you start, the better since “you can’t make up for lost compounding.”
"Every dollar you don’t save in your 30s, 40s and 50s is a dollar that can’t compound. A $10,000 investment made at age 45 will be worth around $32,000 at age 65, assuming a 6% annualized return," she writes.
"Invest the same $10,000 at age 55 and it will be worth less than $18,000.”
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4. Don't take out a reverse mortgage in your 60s
With interest rates sky-high these days, taking out a mortgage these days isn't for the faint of heart.
But for financially pressed seniors, reverse mortgages might seem like the solution to a serious short-term problem. With this type of home equity loan, you can tap into your home's value to get a cash infusion either as a lump sum or in monthly installments.
The loan is repaid, with interest, when you die or sell the house.
You can take out a reverse mortgage starting at age 62, but Orman says that's risky.
"I've never been a fan of reverse mortgages and I'm never going to," she said on her podcast in September.
"I would never advise to do one in a million years."
In her view, it's best to treat a reverse mortgage as a last resort for emergency money, and to wait as long as you possibly can before going that route.
5. Don't go without a will
"Do you have your estate planning in place? If not, you might want to think again," Orman wrote on Oprah.com.
While everybody needs a will, most Americans don't have one and lack other important end-of-life documents.
Orman believes people tend to overthink and complicated what can actually be a simple process. "What is hard about talking through and making plans to protect each other and your loved ones? That’s all estate planning is," she says. "It is neither hard nor expensive to create the handful of documents you need," Orman says. Those documents include:
A will detailing who gets what after you die. But if you have only a will, your loved ones will likely be required to go through the court process of probate.
A revocable living trust allowing your family to avoid probate after your death and putting someone (of your choice) in charge to handle your affairs should you become unable to do so while still alive.
A financial power of attorney appointing someone to act on your behalf to handle your finances.
A durable power of attorney for health care laying out all your medical care wishes should you become too sick to discuss them with a doctor. "Step back for a sec and think about what those four documents deliver. Peace of mind," Orman says in the blog post. "Again, how is that a difficult conversation?"
Don't be afraid to bring in expert help
While Suze Orman has some great advice on how to handle your finances, sometimes it pays to find an expert who can sit down with you to help with your particular plans and goals.
Preparing your finances for retirement can be taxing, especially given current inflation rates and a looming recession.
According to data by the Federal Reserve Board, only 40% of non-retirees feel confident about their retirement savings — clearly many Americans could use help navigating their finances and making sure their assets are protected.
Working with a financial advisor is often a smart move, and it’s better to get started sooner rather than later.
Since many people find it overwhelming to find a suitable and trusted professional, there are free online services designed to match you with a pre-screened financial advisor who will meet your unique needs.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.