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 older 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 50+ 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 take a deep 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 put more into 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 can make money from, 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 another 10 or 15 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, cost you less in home insurance, and become 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 this 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 rebounds.
With a substantial emergency fund, you will be able to fend for yourself until it is again safe to withdraw funds from your retirement account. 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 won’t 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 everyday purchases.
5. Update your investment portfolio
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 still give you income,” 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.