401k, Emergency Fund, Home Loans, Insurance, Interest Rates, Investing, Retirement, Roth, Roth IRA, Saving Money, Taxes
November 09, 2020
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On this episode of Ask Suze (and KT) Anything, Suze answers questions from Women & Money listeners selected and read by KT. We hear from Marque, A Big Fan, Lauren, Debbie, Julie, Deedee, Claire, Sammy, Eileen, Van, Newly Weds, and Taryn. Plus, Suze answers the KT Quiz Question from last week.
November 19, 2020. Welcome to the Women and Money Podcast as well as the men smart enough to listen. And KT's here. I didn’t say my name yet? No, I'm looking at the date and I'm thinking, Oh my God, next week's Thanksgiving, you know, what are we going to do? Like a Thanksgiving podcast? Suze, let's give everyone give away your turkey recipe. Suze, Suze makes Thanksgiving. We've been doing this now over 20 years. Suze cooks the entire Thanksgiving dinner, but let's not talk about that now. I just can't believe that it's already. Next week is Thanksgiving. How excited are you? I'm really excited, but I'm sad because only well, the family can't come because of Covid. So we have Lynn. We have my sister and her husband. It's gonna be a very small Thanksgiving. A small turkey. No, we still make leftovers and soup and all those good and everything all right? Now, as I was saying, Suze O, here, that. Welcome to the ask anything part of the women and money podcast. Um, all right, KT, let's just go through it since you're just so you're just, like sitting there so excited. She's like, I've got a big pile of questions, so let's try to do a rapid fire. Wait, I just have to say something. So have you noticed last week, KT didn't say Suze and KT, Are you choosing ones now that are just for, you know. I think that because some people Suze was concerned that some of you feel that if you don't put my name in it, I won't selected. So almost all of you are now putting my name in, but I'm just not reading it. I'm keeping out, and it doesn't have anything to do with what you choose, right? No. Never. And what? That what? Everything. That. Just playing with the question. But I love all the compliments I’m getting. Okay. Ready? Yeah. So this is from Marquis now that a number of discount brokerage firms have commission free programs where you can buy slices of stock. Just heard of Charles Schwab. Add our dividend reinvestment programs drips worth it. So, KT, what's dividend reinvestment and what’s a drip? I have no idea what a drip is that you don't know what a drip you've never heard of a drip. Here's what you need to understand everybody. You all know what slices are hopefully by now, and a slice that you can get at Charles Schwab or Fidelity or Robin Hood or any of these discount brokerage firms now allow you to buy just a small part of a stock. So if you love Amazon, for instance, and Amazon is that $3000 a share and you can't afford one share, you can invest $5 and own $5 worth of Amazon. Now many, many stocks pay a dividend, and you could even look at the Vanguard Total Stock Market Index ETF that I really love. They pay about 1.7% dividend, so they actually pay you. They give you money every quarter. It's usually every three months, and a drip is that you can actually reinvest that dividend to buy more stock. So rather than them giving you that dividend in cash, they literally reinvested for you. And given that you're not paying any commission anymore for these purchases in the right discount brokerage firms, your reinvesting for no commission whatsoever so you should absolutely take advantage of drips. It's easy to do. They'll just tell you, Do you want all of your dividends reinvested? You click Yes. And you don't have to think about it. I don't know. That's what it was. Because we have a lot of dividend paying stocks. We do. But I don't get involved because I don't reinvest the dividends. Its dividend reinvestment, KT, we do not and reinvest the dividends for many reasons, but most people do. Okay, alright. Okay, Suze, the next ones from a really big fan. I have life insurance and can add my husband at half the amount I have through my employer. Is it wise to add a mortgage protection plan as well? Well, it states that it will cover in the event of death disability, chronic critical or terminal illnesses. I don't know much about mortgage protection insurance. It seems like an additional benefit because neither of us can afford our house without the other person. Good question. Here's the thing, though. I want you to listen closely, to when mortgage protection will pay for you in the event of death? Well, you already have, uh, insurance policy, life insurance policy through your place of employment. So, in the event of death. Disability, how do they define disability? Chronic critical or terminal illness? How do they define that? So chances are you might not be covered if you have a chronic illness or a disability or a critical or terminal illness unless it fits their description. So you just have to be very clear on their definition, because chances are they're not gonna want to pay for it. So just be very careful before you take it out. Read the small print time. Small print. Read the small print. Everyone okay, next question from Lauren. Should I pay off my private student loans of about $8500 with variable interest rate currently at 5.75%? Or should I max out my Roth IRA for 2020? I cannot afford to do both in case age matters with regards to your response. I just turned 40. 0h, she's the same age as our niece, Lauren, Right? So here's the thing. Girlfriend? You're young. You are so young when she'd love to be 40 again. Looking at me. No. Why not? I'm so happy right where I am. I lived a great life. All the decades were fabulous. But I'm really happy right now. You are now. I would like to be 30 again that was a really great decade. I won't ask her why. All right, so here's the thing. You're so young and because of the compounding of money, and you're only allowed to put in a specific sum of money every year into a Roth IRA. I want you to fund the Roth IRA. But I also want you to do something with your student loan. I want you to refinance it. 5.5% is way too high right now of an interest rate. So go and look at places to refinance that student loan. Get it down to, like, 2.5 or 3% and you can have your cake and eat it too. At 40. Alright. So, Suze, next question is from Debbie. I guess I'm confused on what is income. I am 61 work full time. My husband is 69 due to health issues no longer is employed. But collects SSI We file taxes jointly. Based on income, we qualify for contributing to a Roth. Since my husband only collects SSI can he contribute to his Roth? All right, easy. No, Because SSI is not earned income earned income is when you earn it. However, what he can do because you are earning money, is he can open up what's called technically a nonworking spousal Roth IRA. And he can contribute up to the maximum if he wants to. So he can have his own Roth IRA, even though he doesn't have earned income as long as you do. This is for Julie. Hello, Suze. I enjoy listening to you and now, KT every week. My question is about fees on my Roth. The financial advisor from my husband's work set me up personally with a Roth IRA. It is the American fund moderate growth and income fund. I was looking a little closer at my statement. It says there was a $10 set up fee. 5.72% sales charge fee on every new contribution. And then she said, she contributes $50 a month and an annualized expense ratio fee of 0.7%. I always hear you say, Don't pay a lot of fees. These fees seem excessive. What do you think? I think that's what happens when you deal with the financial advisor who doesn't explain to you, because you should have known up front that this financial advisor was selling you a loaded mutual fund. That fund has to go up in value 5.72% just for you to break even. Who gets that 5.72% he or she does, the financial advisor does. What does that financial advisor have to do with the performance of that fund? Absolutely nothing. It is like What does a car salesman have to do with the performance of the car that you're going to buy? Nothing. Who keeps the car tuned up in everything? The mechanic. So the portfolio manager, the person who gets the 0.7% expense ratio that goes to pay the portfolio manager the person who buys and sells all the stocks in there. So I do not like loaded mutual funds. You know, I just have to tell the story. KT, when I first started in 1980 the only mutual funds that you could buy were loaded mutual funds where I made a commission if you bought one of those. As time went on, those just became passe, and the truth of the matter is, you want a no load mutual fund. A mutual fund that doesn't charge you any commission to buy or sell. Here's what I want you to do you already paid the load on the American funds in American Fund is a fine mutual fund. I don't like that it charges a load, however, Leave the money that you've already invested in there Julie. Now start a new Roth IRA. At a discount brokerage firm Schwab, Fidelity wherever you want, open up your Roth IRA and if you want to buy something for $50 a month just by the Vanguard Total Stock Market Index ETF.The expense ratio on that is 0.3% so it's nothing. It will pay you a dividend yield. It's got 3500 stocks in it. It will perform equally as well for you. And it won't cost you anything. To buy or sell. Good. Okay, Next question. This is from DD. I want to take advantage of the low interest rates on my mortgage. I currently have 5%. If I reify what is the difference between taking money out as opposed to a heloc? Yeah, I'm looking at you like, Oh, I don't quite understand that question, but here's what you need to really understand. Uh, heloc is a home equity line of credit. And you do not fix the interest rate on ah, heloc. It varies according to what interest rates are doing at the time and the reset periods. If you're going to refinance and really take advantage of these low interest rates, you want to refinance with a home loan, a new mortgage where you lock in the interest rate. If you want to take out extra money right now, do it that way. Don't do it through a home equity line of credit. The next question is from Claire Suze. I've been researching the traditional IRA to Roth conversion and its tax implications. I have no employer sponsored benefits, so after taxes are deducted from my paycheck I put 7000 in my traditional IRA and take the tax deduction. So now if I convert, I have to pay taxes on the conversion again. That's double taxation. Please clarify. And what was her name? Claire. Don't you think that's funny? Clare? What? Clarify? Here. It's easy. You took $7000 that you pay taxes on you. Then got to take that $7000 off of your taxes. Your income not your taxes, but your income. So now you're even. You haven't paid taxes on that money, so to speak. All right, you're even. You pay taxes. Then you got a tax write off. Now you're going to convert so now you have to pay taxes again. Because the other time you just canceled it out. So, really, you've never paid taxes on that money, so to convert, you have to pay taxes on it. So it's not doubled its not double tax? No. So next question is from Sammy. I believe you recommend people save eight months an emergency funds. My question to you is how much emergency fund is too much. My husband is a very financially conservative person are cash reserve has grown to seven years worth of living expenses. Wow. So instead of eight months, he went for seven years. Suze, right? Or almost a quarter of our net worth. I'm afraid that the savings will be worthless in our old age due to inflation. If it's too much, what do you recommend we do with the cash? So, Suze, Sammy is 46 years old. There you go. And so what to do with the cash, Sammy, what is the goal of money? That goal of money is for you to be secure. And it may just be that your husband needs seven years of cash for him to be secure. Now, is it possible or probable that there would be something better to do with that money to make that money grow? Absolutely. But is it worth him being insecure to make money grow? I don't think so. Now, what I would be looking at is this, you probably own a home. Do you own that home outright? If you don't own that home outright, I would take some of that cash and pay off your mortgage all together. That will make him feel totally secure. Also, he doesn't have to take a lot of money and invest, if he has seven year’s worth maybe you can say to him, Honey, can we just take one year and dollar cost average into the market? Can we take one year and set up Roth retirement accounts for ourselves if we qualify or regular retirement accounts? Honey, can we do something or, honey, can I have a sum of money that I can invest on my own and see how I do with that? However, I have to tell you, if it makes him feel uncomfortable, I wouldn't be touching that money if I were you. You know, KT, I don't know if you will, of course you know this, but we keep a tremendous amount of money in cash because it makes me feel totally secure far more than eight months or one year or even two or three years. And it's just what makes me feel secure. Doesn’t it make you feel secure? All I know is that Suze has a rule. If we ever want something like, let's say she wants a new boat or she wants something she never uses that money that she has secured and cash. It's like a big nest egg. It's a huge nest. So now they're wondering, What do we do? Where do we get that money from? It has to be new money. We have to earn new money. It's called KT. You want something we need to earn new money. That's why we work. Way actually. Keep working. And we actually enjoy the Forever Has been wanting me to now buy a new boat. She thinks I deserve a new boat. She does. She don't. But I love my boat. I'm not getting a new boat. I love my boat. All right, go on. Okay. Well, we did get her new pair of sneakers recently, so she spent a little money. All right, So, Suze, we have a question from Eileen. I keep receiving offers of additional accidental term life insurance without additional medical exams. Are these plans worthwhile? I don't think so. I don't like em because I rather see you buy, how old is she? 42. At 42 you're better off buying term life insurance so that no matter what reason, it is that you die. You get insurance. So if you're still insurable and especially if you're young, I would not be wasting any money on accidental insurance at all, because you only get paid if you die in an accident. And the chances of that are pretty slim to none. Really? If you think about it, let's hope. Yeah, okay, next one is from Van. Is this a good time to convert traditional IRA to a Roth IRA? And how the best time to convert, uh, traditional IRA toe a broth ira is when the markets are down? Big time number one so that the value of your retirement account is less like a few weeks ago, when the markets really were down at one point seriously, like 10, 15% in just a few days? Perfect time to have converted. So number one when the markets are down. Number two when your income is down so that maybe you didn't make much money this year, as you may make next year and we're at the end of the year, so that if you are going to convert why not just convert half this year and half next year split it so you don't get the tax hit all in one year. But whatever you do, make sure you check with the CBA before you convert to really think about how much you should convert, because whatever you convert, you're going to owe income taxes on. Next one. I like this question, Suze, because it's from newlyweds. But newlyweds that are 44 years old and 54 years 50. Yeah, as a couple, we make about 150,000 year annually. I have about 31 K in my current 401 K. So I was going to start investing 6% to meet my company's match. We had talked about moving from a traditional to a Roth IRA. I hear you talk about it all the time, but then it dawned on me with our age difference. Should I even invest in our 401 K together? Or should he have his own 401 K account? Since he is closer to retirement than I am, let's get this straight everybody. You cannot ever invest in a retirement account together. An individual retirement account and I are a is under your individual name, an employer sponsored retirement account is with your employer, and it's for the employees, not for the spouse of the employees, but for the employees. So all retirement accounts are held in the individual name of the person or the employee. Number one. Number two. You should still invest in the 401 k up to the point of the match. But hopefully it would be a Roth 401 k at your place of employment. Thea exact same would be true for your spouse. Besides your 401K’s at work, you both cause you qualify for it income wise, should have Roth IRAs in your individual names as well. Just that simple next one girlfriend. Okay, Suze, last question before the question before we go to the quiz. So last question. I am 46 a single mom. I'm selling my house and will be left with about $115,000. My goal is to buy a two family house next year to help me pay the mortgage. What do I do with the money until I buy a new home? So this one's easy. Listen, everyone doesn't matter if the markets go up. If the markets go down. Money that you need within three years is not money that belongs in the stock market. So you're just gonna have to keep it in a high yielding savings account. Money market account, credit union, whatever. That's it. You're not going to do anything else with it. All right, Travis, here it goes. The KT Quiz now. Okay. Do we remember what it was. So, KT, tell everybody what we're doing now. So last week, I decided that I'm gonna end these shows Ask Susie with an Ask KT quiz question. I ask all of you to ponder this until Suze answers it the following week. Here's the question again. So this was a 58 year old single mom who rents an 800 square foot one bedroom apartment in Southern California that she shares with her two teenage kids. That air now attending junior college. So bottom line was, she can't afford to stay in Southern California. She wants to leave the state in two years. She needs to buy a modest home for 50 or $100,000. And what she has while she's working, she makes $70,000. She has a Roth IRA with $40,000 in it. She has a traditional IRA with 300,000, and she has a seven-month emergency fund. So the big question for all of you was should she tapped the Roth, remember? 40,000 for a home or should she rent? And now Suze's gonna answer my quiz. So here is the answer. How did you all answer that? Because she is going to be over the age of 59 a half in a year or two when she goes to do this, she can take out all $40,000 from her Roth IRA without any taxes or penalties whatsoever. She will still have a seven-month emergency fund. She wants to buy a modest home for 50 to $100,000. So if she took out $40,000 from her Roth, which is why I love Roths everybody. She could then put down $40,000 on this home and have either a $10,000 mortgage or a $60,000 mortgage. She'll probably be able to afford that because she has 300,000 still in her traditional IRA, and she'll probably have more than that because it will be two years from now. Still will have her emergency fund, so she absolutely should buy something. However, here's the caveat. She should probably rent at first to make sure that she gets familiar with the area that she wants to live in and gets to know before she just goes and buys something. So that is the answer to that question. All right, did you all get that one right? Are you going to do a quiz every week? You know, next week is Thanksgiving so what I want to do is, if you like this idea, because it's fun, it's a little bit of a game, and I'm gonna elaborate on it make it even better and more interactive. If you like this, just let me know, send a little note to Suze and podcasts at gmail.com and let me know we'll weigh in on it. And if you like KT's quiz section, we'll continue and make it even more fun. I may even have prizes attached to it. Are you kidding me? I want to start having prices. All right, so so next week's Thanksgiving, and we're going to do a fun Thanksgiving special. Don't miss it. In between waiting for that turkey to come out of the oven. Listen to our podcast. You're gonna love it everyone. she's gonna ask me question. I'm going to share an amazing recipe, which you're gonna be able to find on the women and money App. All right, everybody so and some photos of Suze making her turkey. Oh, God. All right, let's end this KT enjoyed this. Asked Suze anything and until next week, you stay safe, everyone.
Credit & Debt, Saving, Investing, Retirement