401k, Financial Advisor, Retirement, Stock Market
March 19, 2020
Listen to Podcast Episode:
In this special March 19 podcast of Ask Suze Anything, Suze groups together questions coming in from Women & Money listeners about this volatile time in the stock market.
Suze Orman here and you are listening to the Women and Money podcast on March 19, 2020. My od, we're almost at the end of this week, these weeks are killing me, watching the markets go up watching that markets go down. I hope you're not watching them like I'm watching them because they really, they really can make you crazy. So, I know today is supposed to be Ask Suze Anything, and I also know today that I told all of you that I would tell you about how to choose what to look for, the one thing really to look for, when choosing a dividend-paying stock. But if it's all right with you, I would like to postpone that just until this coming Sunday. Not a big deal, just a few more days when we will go to Suze School, and I want to go to Suze School about a few things that I really want you to understand when it comes to these markets. So, that will be this coming Sunday. But for today, I want to talk to you a little bit about many of the things that you're writing in and asking me about. So rather than answering your individual emails, I'm going to kind of group them together about things that I really, really want you to understand. Because a lot of you are taking actions right now because you are so afraid, and the problem with that is you are making bigger mistakes by taking these actions than, really, if you just didn't do anything. For example, I'm getting so many emails and you know what you're saying to me? You're saying to me the following. Suze, I am so afraid of what's going on in this market so I have decided, I have pulled all the money that I have in an IRA out, and I'm simply putting it in my savings account. And I'm sitting there and I'm reading these emails, I'm going like, no. And it's not just one email like this, it's at least 10 in the past three days that you're taking money out of your retirement accounts to keep the money safe and sound. Let me tell you why that's one of the biggest mistakes you could ever make. Granted, I get it that as of the close of business last night, the market was down 35% from its high. All right, I get that but this is where we are right now. So most of you are down 35% in your portfolio, and now you voluntarily choose to sell the stocks, mutual funds, or ETFs that you're in, clock that 35% loss, and then withdraw all your money from the 401k. And now, all that money is going to be totally taxable to you as ordinary income. So it's very possible that you're going to get another 25 to 30 to 35% hit in taxes. So, now you are down 70% possibly, simply because you are so afraid to just leave it there. Hey, all right, you need to come out of the market because you're scared to death. All right, I can't talk you out of that, but do you have to take your money out of your retirement account? Why can't you just leave it there and put it in a CD or put it in a high yielding money market account or whatever it may be that's paying you 1%? Why can't you just do that? But literally, withdraw large sums of money from a retirement account to do something else with, you are adding at least 20 to 35% or whatever your tax bracket is, to the loss that you have already sustained. And that makes absolutely no sense what so ever. So just don't do it, OK? Just don't do it. All right, next, a lot of you are writing in and you're saying, Suze, a few weeks ago on your podcast, we heard you say that you could get 2.5% on a 15-year mortgage and 3% on a 30-year mortgage, and we are looking all over for that, and we can't find it anymore. So let's just talk about that for a second. Remember, the reason that I date these podcasts now is because when I say something, it's sometimes just for that day that I'm saying it because things can change that quickly right now. So, therefore, what was true may not be true now, which is why you always have to check back in. And here's what happened the week that I did that, and I can't even remember when that was now, the Treasury's, the 10-year Treasury went all the way down to .03%. And mortgages are based on the interest rate on the 10-year Treasury note. So, when the 10-year Treasury note has a low interest rate, the interest rate on your mortgage is that you want to get are lower as well. And that's why everybody was rushing in to get a mortgage at that point. But when the interest rate on a 10-year Treasury starts to go up, so does the interest rate on mortgages. Today, as I'm telling you this, the interest rates in a very short period of time on a 10-year Treasury went back up to almost 1.25%. It's up almost 1% from when I originally told you to refinance your homes. So, as of this date today, interest rates on mortgages are back up again. You know, I watched them go up. I was watching them click up today from 3 to 3.15 to 3.25 to 3.5, they're back up again. Now, you might want to wonder as well, why is it that interest rates on Treasuries go up and interest rates go down? Do you know how I always sit here and I tell you that when interest rates go up, the value of bonds goes down and when interest rates go down, the value of bonds goes up? When people are really, really afraid and they want to keep their money absolutely safe and sound, they buy Treasuries. Why do they buy treasuries? Because the only instrument that is guaranteed by the taxing authority of the United States government is a Treasury. So, therefore, foreign governments, everybody rushed in to buy Treasuries to keep their money safe and sound. They don't put it in gold, they don't put it in the stock market, they don't put it in municipal bonds. They put it in Treasury bonds, again, backed by the full faith and taxing authority of the United States government. So when people rush in and buy something, then they are willing to pay anything for it. So when that happens, the price of a treasury starts to go up because as people want to buy it. The more people that want it, the price of it goes up. And when the prices go up, the yield on it goes down. So again, when interest rates go down, the price goes up. When interest rates go up, the price goes down. But it's really dictated by what somebody is willing to pay for a Treasury. So when Treasuries were at their lowest point here, it's because everybody was rushing in to buy. The price went up, and when the price goes up, the yield goes down because the yield is fixed. So the more you pay for something, the less it yields you or gives you in interest. Recently, because there is such a crunch on money, now this is just my opinion, especially over in China, people need their money, they want their money. Why did I say China? Because China has been a major purchaser of our Treasury instruments now for years. They have more money in Treasuries than anybody, and if people need their money, they want their money, they need liquidity because they don't want to come out of the stock market here, but they need cash. They're going to liquidate their Treasuries, so when somebody sells the Treasuries, they're selling now to get their money. When you sell, it pushes what? It pushes the price down, and therefore the yield goes up. So, the more people that sell causes something to go down. And in Treasuries, when the price goes down, the yield goes up. So that is why Treasuries are higher right now and because they are higher and it happened so quickly, we're back up again. However, if you still have a mortgage where you're paying 4.5% or so, and you can qualify for a refinance, you might want to think about that. Just again, a caution, whenever refinancing, please don't refinance for longer, then what your current remaining years are on the mortgage that you currently have.All right, next, for those of you that are in serious financial trouble, everybody is willing to work with you now. I asked you a week or so ago to please call your creditors to please be proactive. Call your mortgage people, call your lenders, call your landlord, and it turns out that many, many, many of your creditors are willing to work with you. There are many states out there that have already banded the fact that your landlord cannot evict you if you cannot pay your rent, so you might just want to check to see if you are in one of those states. I would give you the names right now, but that's going to change so rapidly. So, just because maybe the name of the state is in a state that you're in, I think you're going to find that every state is going to do that. So just go online and see if the state that you live in has made it so that no matter what, you cannot be evicted if you are renting. Also, many of the credit card companies and automobile companies and banks are willing to postpone your payments on your mortgage and everything and just add whatever it is that you may owe them to the back end of your loan. So if you do have a mortgage, student loan or anything like that, just make sure you call your lender again and go into forbearance on it. Do whatever it is that you can do.Also, I just do want to talk to you about your retirement accounts versus paying your bills. Can you all please remember that I've said this? Money that is in your retirement accounts, your 401k, an unlimited amount of money in your 401k and up to $1 million in an IRA, is protected against bankruptcy. So please think twice before you take money out of a retirement account, especially if you can't pay your bills. If you can't pay your bills than just don't pay your bills right now. It makes absolutely no sense to possibly take the only money that you have, which may be in retirement accounts, to pay bills that then you may end up claiming bankruptcy anyway. It just depends on your situation and how long this lasts and what you have going on in your life, we have no idea where we could all end up. But if you ever find yourself in that situation, can you just remember that I said that to you? Because if you take money out of your retirement accounts, you catch up on your bills, again you feel good for a day or two or three or however long that lasts, and now more bills come in. Now, you don't have any money anywhere, and then you end up claiming bankruptcy and you didn't even have the money that you could have had in your retirement accounts. So I hope that's making sense to you. These are drastic times, I'll be the first to tell you that. I don't think any of us in our lifetime has ever seen what's going on right now. Again, I will always reiterate to you that you have to understand that this was a health crisis that really made our economy seriously ill. And there are now stocks out there that are all the way back to where they were years ago, stocks that never should have been taken down by this market, truthfully. But because everybody is being laid off, everything is being shut down, everything is going to be where nobody can spend any money. All the stocks have gone down. So, with that said, soon, and I don't know when, but soon it has to happen where we have gone down far enough and all of a sudden the faucet will be turned on again, where all this money starts to pour back into the markets. At this point in time, again, having clocked a 35% loss on everything, as soon as they come up with some real understanding of the health crisis that's going on here, and that's what we really need to hear by the way. I mean, part of me feels like there should just be a moratorium on all your bills. All credit card companies, all phone companies, all utility companies should just say continue operating like normal, we will not be billing you and will put all of what you owe us on the back end of what you owe, and you can pay it out over time once everything returns to normal. So, as soon as we were able to take away the financial crisis like that and keep things going because you don't have to worry about a lot of things, we also heard that, yes, we've made some breakthroughs with the virus. Then things will turn around. And I know I'm asking you to be patient, I know I'm asking you to just wait and to stick in there because, at this point in time, it's really for the majority of you the right thing to do. And that's what I'm doing with my own money, by the way. So, I'm not just telling you to do something that I myself am not doing. Do I think that around June and everything, things will start to turn around? I have to tell you, I do. I think it's very probable that starting around April 1, you might want to consider not going in in a lump sum, but again, if you haven't had the courage to dollar cost average around April 1, you might want to start considering it. We just have to see what happens here. I'm again asking you to postpone major purchases or renovations or whatever it is that you may be doing just to make sure that everything really is OK. A few other things that I just want to talk about that really don't have to do with the stock market, so to speak, is that many of you are so afraid and you are going to see financial advisors. And I've already told you time and time again, what I think a good financial advisor should do with you and how they should be with you. And by the way, once again, I'm just going to say this to you that if you are 50 years of age and older, because a lot of you I know are, and you really want guidance on many of the things that I'm saying. My new book, The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime, you might want to look into that book. If you would like it, then we're doing an offer, the publisher has agreed to offer a New York Times bestseller book, hardback, for $10 including shipping. And you could pick it up by simply going to www.SuzeOrman.com/womenandmoney, and right there you can get it for $10. Again, if you don't have that, I would tell you to go into the library and read it. But since I know you can't do that, I think you'll find a lot of things in there at least in helping you find a financial advisor that has your best interest at heart. And the reason that I'm talking about that is, again, so many of you are writing to me and you're saying Suze, I just went to see this financial advisor, and he or she told me all about this variable annuity that's going to guarantee me in seven years from now 7% a year on my money. And then you go on and on about this and how excited you are and how you've done it. And I write you back and I say, well, how much money did you put in? And you tell me $300k, you tell me $400k, you tell me that you're doing it within a retirement account and I'm sitting there, I'm like, really? Really, that's what you're doing? And then many of you are telling me that you're doing it outside of a retirement account, and I'm again going, really? Especially this one woman wrote to me and she said, Suze, I've just been told about this investment and what do you think about it? And I wrote her back and I said, so I have a question for you. Did your financial advisor tell you the commission he or she was going to make on the variable annuity? And the woman wrote back and said no. And I wrote her back and I said, all right, I want you to do something. I want you to go and I want you to ask this person the commission that they are going to be paid for you to put this large sum of money in this annuity. And when they tell you, don't be surprised when they tell you 4%. But here's the key to knowing if they're a really good financial advisor or not. If they say 4% and then they say, but don't worry about it because the company pays me you don't, you have a salesperson and not a true financial advisor. And she says, OK. And I'm actually combining quite a few stories in one here because I've done this now with so many people. And this one woman now goes back and asks her financial advisor, and the financial advisor says, oh, 4%, but don't worry about it, because the company is going to pay me and you're not. When she wrote me this back, I can't even remember at this point in time because it's been quite a week, again, what I said to her. But here's what I want to say to all of you. That just isn't true. A variable annuity is again, a contract between you and an insurance company. And the reason why many of you are told to buy a variable annuity is that when you buy it, it acts as an insurance policy. If you put in $300k and 10 years from now, the markets have taken that $300k down to $150k and you die, you're guaranteed to get back that $300k. If that $300k goes from $300k to $500k and you die, then your beneficiaries get $500k. And you all think that is so great because you'll never get back less than what you put in. But here is the problem. You have to die for that to happen, number one. Number two, most variable annuities charge you a 1.3% mortality charge to pay for that insurance, it's not something that you get for free. And as far as the commission that goes to the person who sold it to you, the reason the variable annuity has a surrender charge is because of this. Sure, that person is paid upfront by the company. That the company knows that if you keep your money in there for a specific number of years, that based on fees and other things that they charge you, they will get that money back. So this particular woman told me, yes, there was an eight-year surrender charge starting at 8% the first year and dropping 1% every year. So that after eight years, if you then decided to come out of the variable annuity, it wouldn't cost you anything. But do you remember me saying that the commission was only 4%? Well, why couldn't they then just let you stay in there for four years with the surrender charge? Why eight years? Because if you get out of this annuity within the first eight years, you have an 8% surrender charge. They've now doubled the amount of money that they paid to that financial advisor. And they know over those eight years they will have not only made money to pay themselves back on what they paid the financial advisors, but they will pay themselves that commission as well. Did that just make sense to you? And I could go on and on why variable annuities, in my opinion, don't make a lot of sense. But many of you are buying them right now for future income. All I ask of you is that whenever you get an illustration from an insurance company, that you look at the guaranteed side of the illustration and not the projected side because they can project anything they want. But the guaranteed, what is the worst-case scenario if you put your money into this variable annuity? If you look at the numbers and you read every single line that has a little asterisk by it and you look up what that asterisk means and you still want to do it, OK. But the main point I'm making here is about financial advisors. Right now, because you are so vulnerable and you want somebody to help you, one of the first things you are to look for when choosing a financial advisor is that they tell you exactly how they get paid. Nobody does anything for nothing, and a great financial advisor upfront says to you, if you buy this variable annuity I'm going to get 4% and they tell you all about it and they ask you if that's OK with you. If they don't mention it at all to you, that's not an honest financial advisor, in my opinion. They need to tell you how they make their money, and you need to know how they make their money because you are the one that's going to be paying them. So I just wanted to talk about that as well. So, I won't go on and on this week about this. Sunday, we will recap again what happened in the market and I will give you a Suze School on dividend-paying stocks and how you really should judge if the dividend is solid or not. And who knows what else we'll talk about on that day? But for now, I guess that's everything that I wanted to tell you in this crazy, crazy world that we're living in. You are again to stay safe, stay strong, stay secure, and keep the faith and stay calm. 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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