Credit Union, ETFs, Financial Advisor, Financial Planning, Mortgage, Retirement, Stock Market
September 23, 2021
Listen to Podcast Episode:
For this podcast, we’re going to revisit an episode from February 2020, where Suze shared stories of different correspondences she had with listeners about the importance of how to manage our money.
Suze Orman here and you are listening to the Women and Money podcast. On today's podcast, I really want to talk to you about how it is better to do nothing than something you do not understand. Now, I know that I have talked about this topic before and I've said that it's one of the laws of money. However, I'm finding by the emails that I'm getting that many of you, far too many of you, are doing things that you don't understand and that will probably end up seriously hurting you in the long run. So, let me just give you an example. As time is going on and over the past 10 years these markets have gone up and up and up, and a lot of you have acquired a lot of money in your IRAs, in your 401ks. And I had one woman write in, and she has approximately $2 million now in an IRA, and all of it has been invested up until this point in the Vanguard Standard and Poor's 500 funds and all the Vanguard funds that I've been telling you to invest in over all this time. And they've done really well for her. And now she has all this money and then she hears me talk about municipal bonds, and she writes to me and she says, I'd like to buy municipal bonds in my IRA, I think I need some diversification. And I write her back and I say, but you can't buy municipal bonds in your IRA, that makes absolutely no sense. Plus, you're not allowed to. And basically, just for education purposes here, so on this podcast today, we're going to be going in and out of Suze School. So you might want to take out some pen and paper and write down some of the things that I'm saying because you need to know these things. So, let's start right now with a municipal bond. A bond is a debt instrument. It's where some entity needs to borrow money to do whatever they want to do with it, and they borrow money from investors like you. And when you buy an individual bond, a bond has the maturity date. You buy it today and maybe the bond will mature in five years, 10 years, 15 years, or 30 years. And each bond based on its pricing will give you a fixed interest rate for the entire length of the bond until the day that it matures. So your interest rate is fixed. Now, there are different types of bonds. There are corporate bonds that corporations issue because corporations need funding for things. There are Treasury bonds, bills, and notes. A bill is a very short term investment, a note is about seven years, and a bond is 10 years and longer that the United States Treasury issues because they need to borrow money to pay all their bills. Then, there are municipalities that need to borrow money so that their cities can grow, and build bridges, or pay their bills as well. Now, listen closely. Corporate bonds are totally taxable to you as income, ordinary income. Treasury bills, bonds, and notes are taxed to you on the federal level as ordinary income. But on the state level, if you live in a state where you have to pay state income tax, it is tax-free on the state level. Municipal bonds are federally tax-free, regardless of the state that you live in. If you want a municipal bond that is also tax-free on the state level, you have to buy a municipal bond issued from the state where you are a resident. Many of you may live in a state such as I do, Florida, where there is no state income tax. So any municipal bond that I buy is tax-free on the federal and state income tax levels. Got that? Now, normally, a municipal bond doesn't pay as high of an interest rate because it is tax-free as a Treasury, which is taxable. And normally a Treasury doesn't pay as much as a corporate bond. I could go on and on about bonds and how they work, but that's not the point that I want to make here. So a municipal bond, because it is already tax-free, it makes no sense to own a municipal bond in a retirement account that is either tax-deferred, if it's a traditional retirement account funded with pretax dollars, or a Roth retirement account, which is tax-free, that is funded with what? After-tax dollars. So, you would never ever buy a municipal bond in a retirement account. Plus, you're not allowed to anyway. So, now I'm talking to this woman via email, and I'm sensing that this is a lot of money. Two million dollars is a lot of money, and I'm being asked a question by a woman who's managing her own money that doesn't even know that. And that's not putting her down, but that's a danger sign for me. Warning, warning! And it's a warning sign because if you don't even know that, that means you don't know a lot about investing. You may know a little, you put money in passive index funds and they made you a lot of money, but that might just be the extent of her knowledge. Then she writes back to me again, and she says, well, what if I just take money out of my retirement account and pay taxes on it so that I could buy municipal bonds? Now, my real warning signs go up, and I'm like, no, you would never, ever do that because that makes no sense. If you want to be in bonds, you could buy a corporate bond or a Treasury bond or whatever you want within your IRA, and then just take out the interest because those bonds are going to pay you a higher interest rate than a municipal bond. So, why pay taxes on something just to then take that money and put it into a tax-free bond, but at a lower interest rate? I hope you're all following this because these are lessons that you really need to think about and know about. And then I write her back again. So in case you're wondering, I write many of you back three or four or five times because a good financial advisor, if they are giving you advice, they need to ask questions, and they need more information in order to do what? Answer your question correctly, because otherwise they're just, you know, in the blind, and you don't want that. So, yes, I write her back again. But this time I say to her, you know if you don't mind, do you think you might want the aid of a really great financial advisor who could guide you in this situation? And she writes back and she says, I think that would be a good idea. Because also in that email I sent her is I said, I'm getting afraid for you, I'm sensing that you really aren't as sophisticated as you need to be to handle $2 million. And she agrees and writes me back, and I then sent her the name of somebody that I would like her to call. Now, a few things. When I sent her that email back with the name of somebody I would like her to call, I also told her the following. It doesn't matter that I like this person, what matters is that she likes this person. That in her gut, this person is somebody she can identify with, that was number one. And number two, that I do not make a penny in a referral fee if she uses him. I don't care if she uses him or if she doesn't use him, but if she does use him, she needs to know I'm not making this referral so I can make money off of it. And I tell you that so if anybody makes a referral to you, you should absolutely ask them if they get a referral fee and if they get a referral fee, I would not take their referral. Now, a great financial advisor or anybody, if they make a referral, they would tell you upfront that they do not get a referral with it just like I did with this woman. So, that leads me into the next part of this podcast, which is because the markets have gone up so much and many of you may have accumulated $400k, $500k, $1 million, $2 million, or more in your retirement accounts. You really might want to think about getting professional help, because the reason that I say that is this. Today, I was interviewed on a radio show and people were calling in and asking questions. And one question after another went like this, and they were very similar. Suze, I'm 58 years of age, and I'm getting afraid. I have all my money in the stock market, and I need to know, should I sell? And if I sell, what bonds should I put my money into? I'm thinking, everybody's thinking about bonds all of a sudden. The woman who sent in the email a few days ago was talking about putting her money into municipal bonds. This person wanted to know, should they put their money into bonds? Another one called and said, Suze, I'm afraid of the stock market and I'm thinking I should put my money into bond funds. What do you think? And the questions went on, and most of them were about bonds. So, I need you to listen to me. I'm not sure that putting your money into bonds is the answer. And the reason that I say that is that most bonds today, like a 10-year Treasury note, right now, yields 1.6%. And I understand very well that it's safe and it's guaranteed by the taxing authority of the United States government. But do you know that the Standard and Poor's 500 Index is yielding? About 1.9%. They are paying more in dividends than a 10-year Treasury. So is it possible that maybe bonds really aren't the answer like they used to be? Now, I get that you want to keep your money safe, I get that you don't want anything to happen to it. But again, if you have time on your side, you have 10, 15, 20 years or longer until you need this money and you're continuously dollar-cost averaging into what you have, which is where every month you put a specific sum of money in your retirement accounts. I get that the stock markets may go down dramatically, but you cannot time the stock market. You will never, ever beat it if you do that. Do you know that over the past 10 years, I just want you to think about this as I'm saying this...Over the past 10 years, where these markets have been going up and up and up, I mean up so much, it's like you could have averaged 12%, 15% on your money a year for the past 10 years. Do you know that 76% of all the money invested in funds went into bond funds and only 24% went into stock funds at a time when what? When the market went up and up and up. And so what's interesting about that is that those people totally missed out on the 10 most incredible years that the stock market may have ever had. The appetite, obviously, for bond funds, is so great still that there's no reason that anybody needs to raise interest rates because everybody is still buying bonds when interest rates are so low. And what that tells me is that there's no reason that interest rates need to go up for a long period of time because everybody is still investing in bonds even though they can't get an interest rate. But dividends on stocks are actually paying you more than what bonds are paying you. Now, I am not suggesting that you need to keep 100% of all of your money in stocks. I do think that dividend-paying stocks are something if you're looking for more safety and you have time, that dividend-paying stocks are the way to go. And even if that means all you do is you buy the Vanguard Total Stock Market Index E.T.F. (symbol VTI) which buys the whole index that yields you 1.78%. The Standard and Poor's 500 E.T.F. yields 1.75%. So, you could just do that and that's still a better yield than you're going to get on most Treasuries, locking your money up for 10 years. So you don't have to go into bonds and lock up your money for a specific period of time when all you would have to do is keep your money liquid in a high-yielding online savings account or credit union. So, I hope I'm making sense to you because I'm getting a little afraid that again, a little knowledge can be a dangerous thing. So, it is better to do nothing than something you don't understand. And again, we go back to financial advisors that if you happen to have a large sum of money, you might just want to call one. Again, I would not be using a financial advisor that works on a commission basis. And if they do work on a commission basis, as long as they tell you what their commission is, how it's going to work, and you like them, OK. But they have to be honest with you. I like financial advisors that work on a percentage basis of the money under management, but you would never pay more than 1% to a manager like that. All right, next, I get another email from a woman who's 71. And this one is breaking my heart because there's nothing I can do about it. And we must have gone back and forth, her name is Carol, and we've gone back and forth maybe 10 or 15 emails now. And Carol is 71 and she has severe COPD. And she only has income of about $1500 or $1600 a month, that's it. And her son lives with her and her son needs help. And he's older now, and he only can function and bring in enough money for odds and ends for himself. He has a car, this woman doesn't have a car, and she didn't know what to do. And she's all alone now and she wasn't educated in finance, and her husband died, and now here she is, in a situation where somebody calls her and she owns a home, and she owned it almost outright. She had $53,000 left to pay and it would have been hers, and he convinces her to do a reverse mortgage. And she does a reverse mortgage because she thinks that means she's going to get to keep the house and everything will be OK. What she didn't understand is that when you get a reverse mortgage, that if you owe money on your house, part of the reverse mortgage proceeds are used to pay off the mortgage that you have on the house. So now the house is free and clear and you owe the reverse mortgage that money, so to speak, because that comes off the amount of money they're going to give you. And for those of you who don't know what I'm talking about, a reverse mortgage is where you own a home and you want to stay in that home, or you think you do anyway, for the rest of your life. And all of your money is tied up in the house, you have no other money, so now you're in a real dilemma. You have money, but you don't want to have to sell the house to get the money because you love your house and you don't want to move from your house, but you need the money because you can't pay your bills and you don't know what to do. So then somehow you get yourself into a situation where you do a reverse mortgage and a reverse mortgage is this. A bank takes possession of your house and rather than you paying the bank, the bank pays you. And your payments are based on your age at the time that you take out the reverse mortgage, the current interest rate environment, and the value of your home. And there are different ways for you to access the money that's in the house. You can get it every month, or they can give you a checkbook and you just write checks against the equity in your house, or they give you a specific sum of money every year. And what Carol did is she didn't know any of this, and she didn't know that the reverse mortgage company was number one, going to pay off her mortgage. Number two, she was told she was only going to be able to take out, like $8000 a year. And she said, OK, OK, OK. And then she needed more money, and she called them and they said, sorry, you can't get more money for a whole other year. So now she's stuck in this house, she has no money, and now she doesn't know what to do. And we're trying to get her out of the reverse mortgage. I connected her with the expert in the United States on reverse mortgages and getting her out of it, because the truth is, the person never explained to her what she was getting into. Because now, if we sell the house, all of a sudden she owes, like, $90k on this reverse mortgage. The house is only worth $148k so she's only going to get like $60k and she can't do anything with that now. If she simply had sold the house to begin with, we could have figured it out from there because owning a home is expensive. Because it's not just like all you have is your mortgage payment. Then I come to find out that she's behind on her utility payments and trying to negotiate something there because she doesn't have enough money, even pay her utilities. And now we have a real mess. It is better to do nothing than something you do not understand, which is why this podcast may really be the most important podcast out there today. Because the entire goal of this podcast is to educate you on what you should do, but also, educate you on what you should not do. And just doing something to do it makes no sense. And it doesn't help you when you hear me talk about something and you're not quite sure what I said. Oh, Suze, your money is in a municipal bond, so I'm going to put my money in municipal bonds. I put my money in municipal bonds in 2007, that's when I bought the majority of the municipal bonds that I have because I had a feeling that everything was going to go down. And then in 2009, I started to put serious sums of money in the stock market, and it went up and up and up. And I don't know if all of you know this, but on CNBC on the show, we had a little contest as to where did we think the Standard and Poor's 500 Index would go, how low would it go? And I said about 650 and this is when it was way up there. Sure enough, it went right around to where I thought it was going to go. So when it hit there, that's when I decided to start putting money back into the market. And how happy am I that I did? Would I personally be buying bonds right here and right now? I would not. Would I be buying dividend-paying stocks here? I would. And I don't care if the markets go up or the markets go down as long as the companies have solid dividend growth, number one. They are cash-rich so they can pay dividends. I wouldn't be too worried about it. So those are the things that I wanted to talk to you about today. Listen, everybody, you've earned it, please don't lose it. There are answers out there, there's help for you out there, but you have to come to the right place to get the right answers. And I don't know, I think if you've come to the Women and Money podcast, you have come to the right place.
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Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
I have checked all the beneficiaries of every investment account and insurance policy within the past year.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.
Credit & Debt, Saving, Investing, Retirement