“The goal of money is for you to feel secure. The goal of money is for you to feel powerful,” says money maven Suze Orman on her upcoming PBS special, Suze Orman’s Financial Solutions For You, which begins airing around the country Saturday, March 1. (Check your local listings.)
But Orman, 62, thinks a lot of us are going about things all wrong to achieve these goals, especially people in their 50s and 60s. And she has blunt advice — what she calls “financial reality slaps” — on how to solve your money problems.
After getting a sneak peek of her special, I interviewed the bestselling author, CNBC host and force of nature.
During our conversation, I not only heard unconventional personal-finance views (“don’t buy bond funds” and “don’t buy stocks unless you won’t need the money for at least seven to 10 years”); an endorsement of Roth IRAs and an indictment of traditional IRAs; fierce opposition to reverse mortgages and blistering attacks on brokers and insurance salespeople. l was even on the receiving end of one of her famous “Suze smackdowns.”
(MORE: Suze Orman’s Advice on Managing Long-Term Care Costs)
Next Avenue: You say on the show that we didn’t learn the lessons from 2008-2009. What do you mean?
Orman: We didn’t learn lessons about real estate or about investing in the stock market.
Start with real estate.
What we didn’t learn from the real estate crash is that real estate is not a liquid investment, it has risk and it’s an asset that costs you money to maintain.
Once again, you see people wanting to get into real estate with less than 20 percent down. They’re not prepared for the fact that they’ll be paying private mortgage insurance or PMI. But unlike the PMI of 20 years ago, which could go away once you had about 20 percent equity in your home, now you’ll often have to pay PMI for as long as you own the house.
What didn’t we learn from the stock market crash?
People didn’t learn to be consistent. When stocks were down, they stopped investing because they were afraid and now that the market has skyrocketed, they’re going back in.
So you sold at the wrong time and you’re buying at the wrong time instead of consistently buying good quality dividend-paying stocks, mutual funds and Exchange Traded Funds or ETFs.
True wealth is built over time with consistency.
(MORE: 5 Best Money Strategies for Boomers)
Should people in their 50s and 60s still be investing in stocks or is that too risky?
In your 50s and 60s, you still have 30 to 40 years of life ahead of you. So not only are you not too old to be investing in the stock market, you have got to be invested in an asset that will stay ahead of inflation over a long period of time. So if you are thinking you are too old to buy stocks, you are going to be paying the price big time when you are 80 or 90.
I was surprised to hear you say in the show that you don’t believe in investing according to your age. You believe in investing according to what’s happening in the economy.
And that’s why you don’t like target-date funds, because they tend to increase their bond holdings as their investors get older?
Say you’re going to retire in 2015, so you invested in a 2015 target-date fund. The fund would’ve had to go into bonds starting in 2010, so you would have missed the incredible rise in the stock market while you got obliterated with bonds.
So you don’t buy the traditional asset allocation advice that says as you age you should reduce the percentage of your portfolio in stocks and increase the portion in bonds?
No, I do not buy that. You should be investing in what makes sense for the economy and for your emotional take on things.
You also say that you like individual municipal bonds but not muni bond funds because funds’ share prices fall when rates rise and you don’t have that risk if you hold individual bonds to maturity.
I do not like bond funds and I never have. I will go with individual bonds any day over them.
Why should people care if the price of their bond funds falls as long as they’re not planning to sell and they’re receiving income?
Oh my god, I don’t know where you got that but it’s the worst advice anyone has ever given you.
When interest rates go down, you would think the shares of the bond fund would go up. But they don’t go up in proportion to what an individual bond would because new money is consistently coming into the bond fund. So it’s put to work at a lower rate than the old money and brings down your yield. Plus you have to pay the portfolio manager.
So do you think people with 401(k) plans shouldn’t put money in bond fund accounts there?
The short-term bond funds are OK.
Which type of individual municipal bonds do you like?
Revenue bonds rated at least AA or better whose money comes from, say, toll plazas — things that are going to go on forever and a day. Toll plazas and bridges are never going to close. I do not like general-obligation bonds backed by the taxing authority of the municipality any more, because so many governments are going belly up.
How many individual municipal bonds does someone need to be diversified?
Ten bonds would be a nice diversification. [Since the minimum denomination of muni bonds is $5,000, that means investing at least $50,000.]
In the show, you recommend having an emergency fund of eight months to a year of necessary living expenses. Should it be more towards a year if you’re in your 50s or 60s, since it would take longer to find a job at that age?
The truth of the matter is I think everyone should have an emergency fund towards the one-year point. The only reason I say eight months to one year is that people freak out about one year.
The reason, in my opinion, that many financial advisers say ‘three to six months’ is that many of them also manage money and they think: Rather than keeping all this money in an emergency fund, why not invest it so they can make money off of your money?
It’s up to you to decide what amount of money in an emergency fund would make you feel secure, knowing that your baseline is eight months. For some people it might be three years.
What’s your advice about managing debt in midlife?
Since you probably haven’t saved as much for retirement as you wish you had, the greatest solution for you is to reduce your expenses. The best way is to get rid of items you no longer need to pay on a monthly basis. Your number one goal should be to own your house outright by the time you retire.
Whether it’s mortgage debt, car loan debt, credit card debt, student loan debt if you still have it, if you want to walk upright into retirement, you have got to get rid of the weight of debt.
You’re a big fan of Roth IRAs, which aren’t deductible and whose earnings are tax-free in retirement. But since people in their 50s or 60s may be in a lower bracket when they retire, is a Roth IRA better for them than a traditional IRA that’s taxed in retirement?
I think a Roth IRA is 50,000 times better in every possible way.
You can take your original contributions out at any time without owing taxes or a tax penalty. When you take out a large sum from a traditional IRA, that could put you in the highest income tax bracket.
And a Roth IRA doesn’t have annual required minimum distributions starting at 70 1/2 the way a traditional IRA does.
You come down pretty hard on reverse mortgages in the show.
I don’t like them.
But don’t reverse mortgages provide a good source of retirement income for people who could use extra money?
If you’re in a home that you really love and the only money you have is in that home, I think you would be 10 times better off selling the home, getting the money today, renting an apartment and having the money from the sale generate income.
You talk a little about long-term care insurance in the show. How should people in their 50s or 60s decide whether to buy it?
You should buy long-term care insurance only if you can easily afford it the year you’re going to buy it and all the way until age 84, the average age of entry to a nursing home. Don’t look at the premiums they’re offering you today; look at whether you’ll be able to afford premiums that are 30 or 40 percent higher in the future. If you don’t think you can, I would not get it.
The mistake you do not want to make is to buy a policy at age 50 or 55, with no problem paying the premiums but when you retire you have to drop it because you can’t afford it. Then you did exactly what the insurance company wanted you to do.