A Guide to Retiring in Comfort

Retirement can be a daunting topic. The gold-plated company pensions of yesteryear are a threatened species these days, leaving more and more people to fend for themselves. But if you’re not a financial whiz, investing and managing your own savings can feel pretty overwhelming.

Luckily, there’s an expert on hand to help you navigate these murky waters. One of the world’s foremost personal finance experts, Suze Orman, has spent the best part of the last half-century helping her clients and readers achieve financial security.

In this article, we’ll be looking at her strategic guide to planning your retirement in the United States. 

Expect plenty of no-nonsense advice on prickly subjects like financially dependent adult children as well as a host of practical insights into investments, spending, and savings.

Best of all, we’ll be starting from where you are right now – not where you think you ought to be. 

So set aside your worries and fears, and let’s start building your ultimate retirement!

Planning for Retirement is Complicated

Retirement was pretty straightforward in the past. In return for decades of service, folks received a pension – a guaranteed monthly income after retirement. 

No one was expected to manage their own retirement funds and investments. All American retirees had to do was cash their checks and put their feet up. For today’s retirees, it’s a different story.

These days you only really find pensions in the public sector. If you’re not a government worker, you’ll likely be funding your retirement in one of two ways.

First off, there’s the 401(k). This is an employer-sponsored retirement savings plan that allows you to save and invest part of your paycheck.

The money you pay into your 401(k) is tax-free, but you will pay tax on withdrawals. Then there’s the Roth Individual Retirement Account, or Roth IRA for short. Here, you’ll be paying tax on money you put into your account while withdrawals are tax-free.

Once you’ve decided which of these savings plans is right for you, you’ll need to think about how much you can withdraw after you’ve retired. Getting this right is vital. Take out too much early on, and you’ll be left short if you live into your 90s – something that’s becoming more and more common.

Then there are interest rates. In the past, it was possible to live off the income generated by investments. Now, though, rates are so stingy that, even with historically low inflation, yields are rarely large enough to sustain people through their retirement.

Add in stock market volatility – not to mention the prospect of another recession like that in 2008 – and it’s easy to see why would-be retirees feel overwhelmed.

If you’re within a decade or two of retiring, or if you’ve just settled into a retirement that may last for 20 or 30 years, there are a lot of unknowns on the horizon. That’s the bad news.

But here’s the good news. Where there’s a will, there’s a way. If you’ve made it this far, it’s safe to say that you already have the will to confront this tricky subject head-on. All you need now is the information to build your confidence, and that’s just what we’ll be giving you in the next section.

Set Ground Rules To Guarantee Financial Security

Like all sound financial decisions, retiring is all about using your head, not your heart. That’s easier said than done. By the time you retire, you’ll likely be a parent and possibly a grandparent. That means you’ll be used to putting others’ interests ahead of your own and providing for loved ones. But if you want to retire in comfort, you need to start looking out for yourself.

Like pensions, parent-child relationships have changed a lot in recent decades. Older generations couldn’t wait to flee the nest.

Today, it’s not uncommon for 20- and 30-somethings to still live with their parents. That’s not necessarily a bad thing – having time to pay off student debt or get a foothold in a crazy housing market can be a smart move.

Allowing your children to become financially dependent, by contrast, isn’t a smart move. To avoid this, you’ll need to set boundaries.

This isn’t about “tough love” – it’s about support. If you’re paying for your children’s housing, covering their grocery bills, or bankrolling their vacations, you’re preventing them from taking charge of their own lives.

Chances are, you’re also sabotaging yourself. If you’re spending money on your children that should be going towards your retirement now, you’ll be reliant on their support later on.

When you go down this road, you’re ensuring that neither you nor your children will be financially independent at key moments in your respective lives.

So how do you set those boundaries? Well, follow these three ground rules.

First off, if they live with you, your adult children must pay rent – no ifs, no buts. Secondly, offer conditional financial support.

Contributing to your child renting a room in a shared apartment while they save for a deposit on a house is one thing. Covering the cost of a place of their own because they prefer living that way – even though they can’t afford it – is a different matter entirely.

Finally, don’t co-sign for your children’s loans. This might not seem like a big deal because you trust your kids, but retiring is all about avoiding risks. You might be certain your child has every intention of staying on top of repayments, but what happens if they lose their job? Well, that’s when you’ll find yourself paying off a new car rather than funding your retirement.

Save Money By Making Smart Decisions

If you’re still working, you’re in a strong position to boost your retirement package. This makes saving a top priority, but lots of future retirees struggle to come up with the money they feel they’ll need later on. If this sounds familiar, don’t worry, there’s an easy fix. All you need to know is what to cut.

Reducing your spending by, say, $500 or $1,000 a month might sound like a punishment, but think of it this way: every dollar you save now is a dollar you won’t need to generate during your retirement. Put differently, spending less today reduces your retirement overhead – the surplus you’ll need to see you through your sunset years.

So what should you be cutting back on to find those extra dollars? Let’s look at an expense you can’t eliminate entirely but which you can drastically reduce: your car.

If you’re not buying your car outright, you’ll need a loan. But if you’re borrowing money anyway, you may as well get the car you really want, right? Wrong! As a general rule of thumb, you shouldn’t commit to a loan you can’t pay down within three years. If you can’t afford to do this, you can’t afford the car – it’s that simple.

Paying off a loan within 36 months means you’ll be spending more each month than if you’d taken a longer loan, of course. In the long run, however, you’ll spend less. The faster you wipe out the debt on this depreciating asset, the less you’ll pay in overall interest.

You can also reduce your costs – and free up even more cash for your retirement – by opting to buy a car that’s a couple of years old. This doesn’t mean buying any old wreck from a shady secondhand car dealership, though.

Look out for certified pre-owned, or CPO, deals. These are used cars that have been inspected and come with an extended warranty. Typically, a CPO car can cost up to 40 percent less than the same model brand-new.

Finally, aim to drive your car for at least ten years rather than trading it in every three or four years. Remember, your goal is to get your loan paid off ASAP. This maximizes the number of years in which you aren’t servicing debts but funneling your money into retirement savings.

Reducing Housing Costs

Old age was once synonymous with failing powers and dependency. Today’s pensioners are different, and nothing reflects this better than the ideal of aging in place – remaining in your home for as long as possible.

Who, given the choice, wouldn’t want to continue living in the house associated with their most cherished memories!

No wonder, then, that so many retirees are adamant about staying put. But here’s the catch: as attractive as this ideal is, you might be better off moving to a smaller home.

There’s no two ways about it, moving is hard. That said, it’s important to remember that memories and traditions travel with you.

What really matters are people – not places. Sure, you’ll miss your old home at first, but this is also an opportunity to create new traditions and memories.

Downsizing and reducing your housing costs is also a smart financial play. A smaller mortgage, for example, means you can put more money into your savings account, pay off debts earlier than you’d anticipated, or delay claiming Social Security until you’re in your 70s.

So let’s reframe this proposition. Moving to a new and cheaper house or apartment isn’t about what you’re giving up right now. It’s about what you will gain over the coming years and decades: the peace of mind that comes from not having to worry about money.

We can make this new proposition even more attractive by putting some numbers to it. Say you plan on working for another ten years when you take the plunge and downsize.

Let’s say the move reduces your housing costs by 25 percent. So if you’re currently paying $2,000 a month, you’d have $500 to spare each month. What could you do with that?

Well, after one year you’d have $6,000. That’s a great emergency fund – or enough to eliminate smaller debts entirely.

If you’re already debt-free, it would easily cover the cost of flights to visit your kids on the other side of the country. You could also put those $500 into a Roth IRA. If you did that for ten years with an annualized 5 percent return, you’d have over $75,000 in tax-free money for retirement!

Best of all, downsizing in this way maintains your independence. You might not be living in the old family home, but you’ll still be living in a home of your own.

Patience Pays In Turbulent Markets

The year you quit work is a big deal for you, but it’s business as usual for your investment portfolio. Just because you’re retiring doesn’t mean your stocks are – they have another 25 or 30 years of work ahead of them! But here’s the issue.

 As you get older, you naturally become more risk-averse, and that means it’s more tempting to pull the plug and sell when your stocks take a nosedive. This, however, is a temptation you should resist.

By the time you retire, you’ll most likely be familiar with bear markets – markets in which the price of stocks drops by at least 20 percent. 

This has happened seven times since 1970. But despite all these crashes, $10,000 invested in an S&P 500 index fund in the early 1980s was worth $30,000 in late 2019. By way of comparison, if that $10,000 had been sitting in a bank all that time, you’d have just $14,000.

This just goes to show that it’s a good idea to tough out bear markets. This will remain true going forward as you enter retirement, but there are a couple of additional factors you’ll need to consider.

If you hit a bear market in the early years of your retirement, there’s a risk your portfolio won’t last as long as you need it to.

That’s because making withdrawals from a portfolio that’s already been weakened by a bear market takes a bigger bite out of the pie than it usually would; this can leave you short later on.

Selling doesn’t solve this problem – remember, if you’re selling stocks once they’ve fallen, you’re selling too late.

Exiting the stock market also makes it harder to reenter later on when things improve. Trying to “time the market” like this means you have to be right twice: once when you’re selling and again when you’re buying. This is very hard to pull off.

OK, so you can’t live off your portfolio during a bear market, but you shouldn’t sell your stocks either – so what should you do? Well, stay invested and give your portfolio time to recover, which typically takes around two years.

This tells you what you need to do before you retire: create an emergency fund that will cover your living costs for a minimum of 24 months to tide you over during bear markets.

Assume You’ll Live To 95 

How long will you live? Well, if you’re in good shape in your early 60s, you should assume you’ll make it into your 90s.

If that sounds crazy, take a look at the odds. A 65-year-old woman in average health has a 44 percent probability of living to 90. A couple, both 65 and in average health, meanwhile, has a 62 percent probability of one spouse being alive at 90.

In other words, if you don’t have a medical condition that is likely to limit your life span, it’s important to take the long view when you’re planning your retirement.

Research shows that we struggle to connect with our future, older selves. We worry about the here and now and rarely think about the bills we’ll be paying in two or three decades. That’s a mistake that can wreak havoc later on in life.

When your financial horizon stretches 30 years into the future, you need to take a second factor into account as well – inflation, the increase in prices and fall of purchasing power over time.

True, inflation is pretty low right now, but even low inflation rates stack up over time. If inflation were to run at 2 percent a year for the next two decades, for example, you’d still need $1,650 to cover $1,000 of expenses today.

So how do you keep up with inflation? Simple: stocks. Over decades, stocks have, on average, delivered returns above the rate of inflation – a feat money kept in banks and credit unions has struggled to match.

This means that stocks are likely to be a part of your retirement plans. In the next section, we’ll look at how you can counterbalance the risk of stock market investments with the security of a guaranteed income.

An Income Annuity Provides A Guaranteed Income 

Longevity statistics suggest you should plan for a multi-decade retirement, and this means that you’ll have to take inflation into account.

As we’ve learned, that’s an argument for owning stocks, which have a higher chance of generating inflation-beating gains. Bear markets, however, can cause sudden falls in the value of your stocks, so you can’t draw a steady income from this kind of investment. Quite a quandary, right?

But what if there was a way of combining the best of both worlds – stability and the managed risk of stock market investments? Well, there is!

Chances are, your number one priority in retirement is security. What you need is certainty that you’ll be able to cover essential living costs. Put differently, you want a guaranteed income that’s always there, even if the stock market – and your investment portfolio – is in free fall.

So where can you find this kind of security? Well, one option is an income annuity. This is a personal pension you create for yourself. In return for a lump sum, which is typically payable before you retire, an insurance company agrees to send you a locked-in payment every month once your annuity starts.

How much you get depends on how much you pay up front and the number of years over which you plan on claiming your annuity. 

As of late 2019, for example, a 70-year-old woman who wanted a guaranteed income of $1,000 a month for the rest of her life could expect to pay around $200,000 for an income annuity.

A 70-year-old man married to a 67-year-old woman who wished to lock in $1,000 a month until the surviving spouse dies, by contrast, would be looking at a payment of around $220,000.

Now, the idea of handing over such large sums to an insurance provider can be pretty intimidating, but it might still be worth it – it all depends on how highly you value peace of mind. Remember, income annuities require no hands-on management, meaning there are no bear markets to worry about and no portfolios to rebalance.

Once you’ve paid, you’ll receive a guaranteed, fixed monthly income. No matter how crazy the world gets, the same amount of money will be deposited into your account every month. This is a buffer that gives many retirees the confidence to leave a chunk of their savings in the stock market and generate those all-important inflation-busting yields.

Creating Two Vital Documents – A Will And A Living Revocable Trust

OK, now that we’ve gotten a handle on planning for retirement, it’s time to tackle a thornier subject – illness and death. These are difficult topics, of course, and it’s easy to put them off for another day.

But if you aren’t proactive now, you’re going to leave your loved ones with a lot of heartache and a financial mess to boot. To avoid this, you need to get your documents in order.

Let’s start with your will. This is where you’ll spell out who you want to inherit your treasures.

In this must-have document, you’ll state that you want Mary to have the gold bracelet and Rob to get Grandpa’s old watch. What it shouldn’t be used for is distributing large assets like savings and property.

If you only have a will, your family will need to submit it to a probate court and get a judge’s approval before your assets can be passed on to your heirs. The probate process is complex and difficult to navigate without a specialist lawyer, making it not only time-consuming but expensive.

This is one reason why you should create a living revocable trust. This is a legal document that creates a trust that you then “fund” by transferring the title of ownership of your assets to the trust. 

Typically, the assets you’d want to own through your trust include real estate, as well as bank and investment accounts. When you die and there is a trust, there is no need for anyone to obtain a court’s approval to execute your wishes and distribute your assets. This is the first major advantage of a living revocable trust.

That brings us to the second thing a trust does that a will can’t: make life easy for you and your family while you’re still alive. Once you have created your trust, you will name trustees – people who have the authority to manage the assets in the trust. This will include you and your spouse, as well as a so-called successor trustee. 

This is someone who can step in and manage the trust in your interests should, say, dementia, Alzheimer’s, or some other degenerative disease prevent you from handling your own financial affairs. This will ensure your money can be used to look after you even if you’re incapacitated.

And there you have it – an actionable plan to build a secure and comfortable retirement and ensure that those you love will be taken care of when you pass.

Conclusion

Planning your retirement is more complicated than it was in the days of company pensions. That means you’ll have to be proactive if you want to enjoy your sunset years in comfort. 

Save money now by driving an older car and moving to a smaller house, and you’ll be well on your way.

Once you’ve retired, you’ll want to stay invested in the stock market to generate inflation-busting yields while covering living expenses from a guaranteed income like an annuity. After taking care of your finances, you’ll need to ensure your heirs are taken care of by creating two must-have documents – a will and a trust.

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