401k, Emergency Fund, Health Insurance, Investing, Marriage, Retirement, Roth
October 24, 2019
Listen to Podcast Episode:
In this Ask Suze Anything podcast, we hear questions from Women & Money listeners Brenda, Kara E, Tiffany, Nikki, R.K., Cindy, and Gladys.
Suze O. here and welcome to another Ask Suze Anything. This is where you write in, you ask a question and if it's chosen, I will answer it on this podcast. To do so, just send in your questions to AskSuzePodcast@gmail.com, S-U-Z-E. I learned a very good lesson today, want to hear what it is? Do not eat peanut butter, except it was almond butter, actually, it was fabulous. Oh, I don't even know what kind of butter it was, but it was great. But don't eat that before you're about to do a podcast, it just gets stuck in your teeth, the top of your mouth. And here I am now having to do a podcast with some kind of butter, nut butter, in my mouth.Anyway, another thing I want to say is that on November 10th I'm going to be doing something that I've actually never done before in my entire life, and I'm going to be teaching a class in Santa Monica, California called The Nine Steps to Financial Independence. And it will take place at about 1-6 p.m. at The Broad Stage in Santa Monica, at Santa Monica College Performing Arts Center, which is at 1310 11th Street in Santa Monica, and we will be taping it because I'm going to be making a class out of this so that everybody can take it. But I will be personally teaching it, and there will only be about 200 or 300 people, students so to speak, that will be allowed because I want to be able to interact with every single one of you. So, if you are interested in attending, tickets are $54. I actually think that's a cheap price to pay for spending an entire day with me, I mean probably totally doing whatever with your financial lives, which is improving them. But that's beside the point. You can go to www.HayHouse.com, and just scroll down to where it says Events and you'll see my little face and click there, and that is where you buy tickets. So, I am recording this right now and this is for the podcast on October 24th. So, on November 10, 2019, you can come to Santa Monica and play with me for an entire day. It's going to be interesting, I'll tell you that much.OK, let's go to our questions. I've picked out so many for today, so I hope I get through all of them. But you know what happens? I start to ramble, or who knows what happens, like I'm doing right now, and before you know it 30 minutes is gone and then, bam, I have to stop. Hi, Suze. Both my husband and I are 38 years of age. I recently received notification that my previous employer is terminating their pension plan. I'm lucky enough to be vested, so I will be getting money. The pension benefit available to me is $22,800 if I take a lump sum. Now, obviously, I can roll it over but I'm thinking about cashing it out. If I cashed it out after penalties and taxes, I would get $14,000. The reason we want to cash it out is that we have a $64,000 balance on a HELOC at a 5.5% interest rate. I believe the amount lost to taxes on this distribution would be close to equal to the amount of interest savings we would get in paying down our debt. Am I missing anything here? Thanks for your thoughts, Brenda.Now, this email actually went on a whole lot longer than that and other details, but I read you the highlights of it in terms of what you really needed to know. Brenda? Yes, you are missing something here. You are looking at your money very, very short term. You take the money out, you pay the taxes and the penalties on this money, and now you pay off $14,000 of interest on your HELOC. But what you did not figure out is what if you had taken the $22,800 and did a rollover with it, you told me that you're 38 years of age? That means, you know, I'll tell you all that you should not retire before 70. So that leaves you 32 more years that this $22,800 could grow for you. So $22,800 at a 6% annual average rate of return over the next 32 years would be about $147,000. So that's really what you are giving up because I doubt highly, I doubt highly that you'll still be paying off this home equity line of credit 32 years from now. That's number one.Number two, I get that you say that you're paying 5.5% interest on that, but why are you paying such a high-interest rate when interest rates are absolutely low right now? Maybe you should look into refinancing, what? Your mortgage and your home equity line of credit (hopefully, you have a good FICO score) into one loan at a 2, 2.5, 3% interest rate possibly, tax-deductible by the way, because you didn't figure that out, either, did you, Brenda? That the 5.5% that you're currently paying is tax-deductible. So do you understand how I don't think you're thinking about this straight? However, if you were to refinance, get even a lower interest rate for the two of them, your mortgage and the HELOC and shorten the term, especially of your mortgage. So, if you have 25 years left on your mortgage, refinance to 20 years. Oh my God, that would be so much better, it's not even funny. So that's what I would be doing if I were you. But I would not, and I repeat, I would not be taking a lump sum paying taxes, paying a penalty, just to pay off $14,000 of your home equity line of credit. I don't think so.This next one is from Kara E., and it's long, so I'm just going to paraphrase it for you. All right, everybody, here's what Kara E. wants to know. She has been following my advice, and she now is contributing her new contributions where she works to a Roth 401k instead of a traditional 401k. Bingo, that's what I told you all to do. If you work for a corporation that offers a Roth 401k, if they do and they should today, they really, really should, your new contributions, what you contribute every single month, I want you to put that in the Roth 401k. However, here's what Kare E. wants to know. How do I transfer my previous contributions to my Roth 401k? Suze, you said this depends on my tax bracket. What does this mean for me? I make $47,000 a year.So what's interesting here is that even though Kara E. is saying she makes $47,000 a year, she's not telling me what kind of taxes she's paying. Does she own a home? Does she have tax write-offs? What is going on here? But really $47,000 a year still puts you, Kara E., in a relatively low income tax break. Yeah, so you also did not tell me how much money you have in previous contributions to your Roth 401k.But if I were you, I would consult a CPA. I would show the CPA, a certified public accountant, or some tax expert, or go online and use these free programs and play with it. Where you play with, all right, you're making $47,000 year. Do your taxes online and then play tax, meaning, pretend like you have converted or transferred $5000 from your previous 401k contributions that are taxable into your Roth and see what that does to your tax bracket. And keep playing around with that until you transfer money every year to the tune of whatever it may be, but where it doesn't put you in a higher tax bracket. Now, in your email, you also say that you are 28 years of age. So, Kara E., you have a lot of time to get the money that's in your traditional 401k over to a Roth 401k. Just don't be in a rush before you have figured out what? Your taxes.Uh oh, before I go on, I see the Kara E. had another question. All right, maybe I better answer this because I think it applies to a lot of you there. She also wants to know that she needs to do something because she's afraid that she's not saving enough money in her Roth IRA, and she is currently saving to build up an eight-month emergency fund, and she has about $300 extra a month to work with. And she wants to know, should she put it in a savings account or what should she do? She is just totally confused, she wants to make the most out of her money. Kara, what I would do if I were you, first of all, I also see in your question that your employer only matches up to 5% of your contribution to your retirement account. So, the very first thing I would do is I would only contribute up to 5%, which is the point of the match. And after that, I would stop contributing to my Roth 401k and I would put any extra money I had into where? My Roth IRA. At your age, because you are under 50 you can put in $6000 a year, max. Now you have an extra $300 a month. Obviously, you say that you are saving that in a savings account, but you can use a Roth IRA like a savings account, like an emergency fund. Because in a Roth IRA, and this is not true for a Roth 401k, but in a Roth IRA, any money that you contribute you can withdraw at any time, regardless of your age, or how long that money has been in the account. So if you put money into a Roth IRA and within the Roth IRA, put it into a high yield savings account, do not invest it because money that is for an emergency fund cannot be invested. If all of a sudden you need it and you need it at a time when the stock market has crashed and the money's in the stock market, you might not have it. So use the money in a Roth IRA to fund up to your eight-month emergency fund. After that, if you still contribute to a Roth IRA, that money could be invested in the stock market. Do you understand? As time goes on and you start making more money, then if you want you can have it in a savings account because you already would have maxed out your Roth IRA. So you're going to do your master plan, is up to 5% in your Roth 401k, fully max out your Roth IRA and then after that, simply save it in an emergency fund. Just that easy.This next one is from Tiffany. She says, hi, Suze. I've been good with money, however, I am trying to be better. I work full time and my husband is a farmer and cattleman. I haven't heard much in regards to agriculture.I know it's true, right? I don't really focus on that on this show so much. I don't know, I have to think about that, but I never want you to feel excluded.She goes on to say, when I met my husband, I had a great paying job that I hated and was a single mom of two. After getting married, he and the bank (ugh, I hate this next line) decided that I had to close my single accounts, my checking, and my savings.I wonder why they wanted you to do that, Tiffany? But want to know what I wonder more? Why in the world did you?So anyway, she goes on to say, so now we have a household account and a farm account. There was a three year period that I was a stay at home mom. My husband wants me now to cover the household expenses and to be able to pay back money that was used to pay off credit card debt and operating loan costs during that time. It seems like all we do is worry about money. It feels like he is OK with purchasing new equipment for the farm, but checks with me after the fact. If we were to ever split, I don't know how I could possibly afford a new life. Please help, Drowning on the farm.That's sad because, you know, most farms don't have a lot of water on it. It's hard to drown on a farm, especially when you're a cattleman and everything else like your husband is. But anyway, Tiffany, listen to me. You already know what you are thinking. Somehow you put yourself into a situation where you agreed with your husband and a bank that you should close down your single accounts. All right, you closed them down, but guess what you're going to do now? You're going to open them up again. And if you are afraid that he will see that you have single accounts or whatever it may be and that you have to hide that fact from him, do you know what that is a sign of? If you cannot openly talk to your spouse about being independent and having your own money, and he will not allow that, that is the beginning of a financially abusive relationship.That is what I've been talking now about for almost two years on the Women and Money podcast. Your husband may be a great man, and you may love him with all of your heart, but I can tell you you're not liking the situation that you're in because you say here "if we were ever to split, I don't know how I could possibly afford a new life." "If we were to ever split." I find that fascinating because that means you're living in fear somehow. Not that you want to split with him, but that you're afraid that he may want to split with you. And you're thinking that because now he wants you to cover the household expenses and pay back the money. What spouse wants you to pay back money that was used to pay off credit cards and all these other things? So in your head, you are afraid that he wants to leave you. In my head, I'm wondering, I'm not exactly sure why you don't want to leave him? Are you only staying because you don't know how you could possibly afford a new life? Girlfriend, you have got to listen to me. You will make it work somehow, but you do not stay in a relationship because you don't know how you can afford a new life.You go out, you get a job, you start putting your money in an account, you do the things that you need to do so that if in fact he ever were to split with you, you would have money and you would be OK. You also have to be very aware that you have been married to this man, and because you've been married to this man, he owes you money. Meaning, you're going to have a portion of that farm, you can have a portion of that equipment, you're going to own a lot of it. So if that ever were to happen, you cannot be a little wimp here, you cannot just back down and go, oh, it's all his. I'm sorry, I failed him, whatever it is, I'm not going to fight him. Oh, yes, you are. Because you deserve to have what is rightfully yours by the law.Now, you know, recently somebody wrote in. They said, Suze, what do you do? You never talk about, I really loved my husband, things aren't working out with him, but I really love him and blah, blah, blah, blah, blah. You're always so harsh, and you're always talking about those that you don't love or whatever it is. Can you talk about what do you do when you really love your husband and you can't make it? Yeah, I will do that. But I don't think this situation, Tiffany, is one where you really, really love him. Because if you really, really loved him, you wouldn't be afraid of what you're afraid of right now.You know, I'm writing a new book, and, um, in order to write a book, especially if you've written as many books as I've written, it's very, very difficult to write a book and be constantly interrupted and have somebody talking to you and do this and do that. So, for the first time in years, KT is on the island and I'm in the Florida house. And here's what I know for sure. I can't tell you how much I miss her. I can't tell you how there's never been one second in the 20 years that we've been together that I've ever, ever thought about not wanting to be with her, and what if she didn't want to be with me, and what would happen? Never. So if you're out there and you're listening to me, not just you, Tiffany, but every single woman and the men smart enough to listen. And you are in a relationship where you are afraid you have to hide something, you can't tell it like it is, and you don't feel like your spouse is like your best friend, you have got to do something about it. You just have to, life is too short.The next one is from Nikki. Hi, Suze. Several years ago, I opened a brokerage account with Charles Schwab because I heard you say you recommend them.Truth is Charles Schwab, Fidelity, TD Ameritrade, all of them, they're all great. Especially now that most of these brokerage firms don't have any commissions whatsoever. Are you kidding me? You could do all this for free? I don't know, I think that's just incredible, I can't even begin to tell you. What that does, by the way, is it allows small investors to be able to buy two shares of stock, four shares of stock, and not be eaten up in commissions. I just love that. Anyway, she goes on to say, I bought some funds to see if I can invest and do well instead of using a financial advisor. However, I keep seeing losses on my funds, and I could not figure out why… OK, listen everybody, closely now.So I called Schwab's helpline and learned that I have been paying significant amounts of capital gains taxes every year. Why do I have to pay capital gains taxes when I didn't sell anything? The woman who answered the phone told me that because the fund managers are always selling and buying within the funds that therefore I'm the one responsible for both short term and long term gains. So my question to you is, how can I avoid funds like this? The funds I have are standard Schwab funds, one example being the Schwab Small Cap Equity fund. This fund went down in value since I bought it, so I made nothing. I still had to pay taxes so I feel defeated and makes me feel I should just use a financial advisor. Nikki, Nikki, Nikki. If you have been listening to me on the Women and Money podcast, have you ever heard me say buy a small-cap fund, a large-cap fund, a mid-cap fund? Have you not always heard me say buy an index fund? I have said that to you from day one. You can read almost any book that I have ever written for the past God knows how many years, since 1995 actually, and you would see that I say buy an index fund. Why? If you buy a fund that has a portfolio manager that buys and sells stocks such as the fund that you have, it is true that you have got to pay the income taxes on the gains of those funds. You also have to pay the commissions every time that they're sold and bought as an expense ratio within that fund. So, you never want to buy a fund that has what's known as a high turnover ratio, which means the portfolio manager is buying and selling and turning over the portfolio a lot. Because when you have a portfolio manager that does that, you end up having to pay taxes. It's not about you using a financial advisor. It's about you getting a little bit more education. What made you choose those funds? Where did you get those ideas? If I were you if you simply bought an index fund, a Standard and Poor's 500 index fund, the Total Stock Market index fund, any index fund, then what happens is you're not going to really have capital gains because they don't turn over the portfolio, they just buy what's in the index. And really, you will do equally as well then if you buy these individual funds with specific purposes, such as a small-cap equity fund. So do not feel defeated, just really, you need to take your time, get a little bit more education and keep going for it. The other thing that you can do if you want, now that Schwab doesn't really have commissions anymore on stocks, is maybe you want to pick out 25 stocks that you like and that you buy a whole variety of them. One share here, two shares there, three shares. Hey, it's possible now that there aren't commissions, you could do your own little mutual funds on stocks that you really like. But the easiest way to do it is to dollar cost average into the Standard and Poor's 500 index fund or the Total Stock Market index fund. Just that simple, again.This next one kind of plays off of the last one that I just read. This one is from R.K. Dearest Miss Suze, here is my problem. Every time after I finish listening to your podcast, I told myself, OK, I am ready to invest. I even had opened a Fidelity account. However, once I get in front of the computer, I started to read, and before I knew it, I got overwhelmed and don't know where to start. Can you please give me a step by step guide to beginners investing so that I can follow the process before I get so distracted and then I do nothing? Thank you, Suze.Well, really, the advice is the same for you, my dear, R.K. If you already opened up an account at Fidelity, hopefully, you opened up a Roth IRA. All you have to do is deposit money in that account, step one. Step two, either place a call or online every single month, take a specific sum of money and dollar-cost average, which simply means take your dollars and buy the same amount of dollars every month into a no-load Standard and Poor's 500 index fund or a Total Stock Market index fund. And you just do that every single month. If you get stuck, pick up the phone and call them. But here's what you need to do. Stop reading, stop getting involved in that, stop trying to understand something, just simply do it. When you are afraid there is only one way to conquer fear and that is through action. So the action that you are to take, and you are to do it all the way through, is you already opened up an account. You are now going to deposit money in that account, and then you are going to take an amount of money every single month and dollar cost average into a Standard and Poor's 500 index fund. If you have at least 10 years until you need this money, 20 years, 30 years, or 40 years, you should hope that this market goes down. Do not stop investing because the more the market goes down, the more shares you buy, and eventually, sometime in the future, it will go back up.This next one is from Cindy. Suze, I'm a 47-year-old woman and was doing my quarterly check-in with my 401k. My husband is unable to work, but I make a good salary. My current 401k's website had a retirement planning tool, and it claims that my estimated average monthly health care expenses will be $6000 in retirement based on no specific health information whatsoever and a retirement age of 67. Is that really what costs are expected to be? That is alarmingly high, and I need to plan well enough to cover both my husband and myself.Cindy, that's why I hate calculators online. It's almost like they scare you into thinking oh my God, I've got to save more, I've got to buy more insurance, I've gotta open this account, I've got to do that. Listen, I am 68 years of age, and I can tell you, my health care costs are not $72,000 a year. Now, that doesn't mean that if I have an operation or something goes wrong that maybe the costs will be up there. But I have Medicare, and I also have Medigap insurance, so it doesn't cost me that much. Maybe it's going to cost me $5000 or $6000 a year to pay for everything. It's not gonna cost me a whole lot more than that. So your monthly, and you have capitalized that I did not read that wrong, health care expenses are not the same as your health care costs. And maybe on average, again when you get older, that is what it costs because things go wrong for insurance and everything else to pay for you. But it's not what you're gonna be paying out of your own pocket.You know, one of the only really great things I just have to tell you about getting older is Medicare. I love Medicare. I love it. You know, I have a brother in law, KT sister's husband, who got sick recently and went to three or four specialists, any doctor that he wanted to go to all over the United States because he needed specialists, and Medicare paid for all of it. Now, with that said, I'm just gonna say it is everybody be very careful of Medicare advantage out there. Because even though it looks like they have a whole lot of benefits, especially for 2020, be careful. A lot of times doctors on Medicare Advantage when you go to them, deny your claims. I've heard it too many times, so if you can, I would do straight Medicare if I were you. But, Cindy, you are only 47 years of age, so do not worry about it and stay off that retirement planner. Got it?Oh, I think we have time for one more, this will be the last one. It's from Gladys and she says, Suze, I bought my house six years ago, and I've been ferociously attacking my mortgage for the last four years. I now have $27,000 before my mortgage is completely paid off. I have not been contributing to my 401k, but I plan to after I pay off my house in April of 2020. Outside of my house, I have no debt. I also have A-1 credit. I'm 48 years old. What do you recommend I do to catch up on my savings so I can retire comfortably at 60 or 62? Thanks.Listen, Gladys, you're so on the road to financial independence, it is not even funny. So do not get freaked out about it. You are 48 years of age. If after next year you stop paying for the mortgage because why, you've paid it off? And you just contribute even $7000 a year because shortly you're going to be able to do that when you're 50. Seven thousand dollars every year to a Roth IRA and you do dollar cost averaging and you invest it, you'll be great. If you have more money than that, then do it in a regular investment account and just keep saving, and saving, and saving, and staying out of debt. If I were to tell you, what is the number one thing all of you should do to plan for a comfortable retirement? The very first thing I would tell you is to get out of debt. To get out of debt. Your goal should be when you finally reach higher that you don't have any mortgage debt, car loan debt, any student loan, debt for your kids, any kind of credit card debt, any debt at all. Because if you don't have any debt, you don't have that many payments. If you don't have that many payments, you don't need that much money to generate income for you to make those payments.I cannot tell you for sure where the market is going to be. I cannot tell you for sure where inflation is gonna be, where interest rates are going to be. I can't tell you any of that. But what I can tell you is, if you simply were to be spending less money, you would be able to save more. If you simply were able to spend less money, you wouldn't need as much money. So your social security, your income, everything would go further. So, Gladys, you are so on the right path and so just keep accumulating more and more and more money, girlfriend.All right, that's it for another Ask Suze Anything. I hope you all take me up on the offer for November 10th in Santa Monica. Come spend a day with me. Let me take you through The Nine Steps to Financial Independence, let me answer every single one of your questions. Let me help you remove the financial blocks that are keeping you from being more and having more. Is it worth $54 to spend five or six hours with me almost one on one? Are you kidding me? Are you kidding me? Of course, it is. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/. Interested in Suze's Must Have Documents? Go to https://shop.suzeorman.com/checkout/cart/index/.
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