Suze Orman’s 5 Rules for Avoiding Bankruptcy in Retirement
After decades of hard work, Americans hope to retire wealthy enough to enjoy their retirement more for decades to come.
But if you ask finance guru Suze Orman, the average person will fall very, very small. Instead of lasting decades, their savings will last about three years.
Right now, the median savings held in retirement accounts in the United States is only $ 65,000, according to a Federal Reserve study released in September 2020. Meanwhile, the government says that Households headed by people aged 65 or over spend an average of about $ 47,600 per year.
If you want more than three good years, Orman’s book The Ultimate Guide to Retirement for People 50 and Over offers five essential rules for ensuring a comfortable retirement.
1. Take a close look at your finances
If you haven’t already, Orman says it’s time to linger and dive into your budget.
Compare what you spend with what you save. Cut fat where you can and cut back on unnecessary spending so you can invest more in your retirement savings column.
Do you own a home and plan to stay there until retirement? Then Orman says you need to make a plan now to make sure your mortgage is fully paid off before you retire.
You don’t know how? Mortgage refinancing at today’s still historically low interest rates could save you hundreds of dollars a month and get you out of your mortgage faster.
2. Reduce the size of your house
You can have many sentimental reasons for wanting to stay in your current home, but if there is more space than you need and you can make money from it, you may consider selling now.
Not waiting until you have to sell the house makes sense, Orman says, because if you invest the profits now, you’ll earn a lot more interest than if you waited 10 or 15 more years.
“I don’t want you to wait until you are 60 or 70 to sell this house,” she says. “I want you to downsize now, so you can start saving more money now.”
While some may be reluctant to part with their family home, a smaller space is easier to clean, cheaper to manage, costs you less in home insurance, and becomes more accessible with age.
3. Build up your emergency fund
Financial experts generally recommend that you have an emergency fund of at least three to six months of living expenses, Orman actually recommends that you do so for two or three years.
Yes, three years of spending in an emergency fund. His reasoning is that if the market experiences a downturn, you won’t want to pull out of your retirement accounts until it bounces back.
With a substantial emergency fund, you will be able to manage until you can safely withdraw funds from your retirement account again. If you need a little help building your emergency fund, you can turn to one of today’s handy online financial planners.
4. Invest in a Roth IRA
To avoid paying taxes when you withdraw money from your retirement account, Orman recommends that you opt for a Roth IRA account.
“Later in life, you want to be able to withdraw that money tax-free,” she explains.
Since your contributions to a Roth account are made after tax, you will not have to make any deductions when you make a withdrawal. Traditional IRAs, on the other hand, aren’t taxed when you make contributions, so you end up paying later.
Most banks and brokerage firms offer these accounts. And if you don’t want to make the big investment decisions yourself, you can open an IRA through a robo-advisor who will manage your retirement account for you.
A popular robo-advisor will even help you grow your savings by investing your “spare currency” from your daily purchases.
5. Update your investment portfolio
Taking a ‘set it and forget it’ approach to your investment portfolio rarely pays off. You need to regularly review your portfolio and make sure it still matches your financial goals and timelines.
Orman recommends stocks or exchange-traded funds (ETFs) that pay dividends. So even if the market experiences a downturn, your investments will still provide you with some income.
“If you happen to find yourself in a time when the market starts to go down, you want those stocks to always make you money,” she says.
Check with your financial advisor to make sure your cash, stock and bond balance matches your retirement goals. Try to keep your costs down by using an investment service that offers commission-free transactions.
You might consider diversifying your investments by going well beyond stocks, perhaps investing money in farmland or investing in fine art.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.