Suze Orman’s 5 rules to avoid going broke in retirement

After decades of hard work, Americans hope to retire rich enough to spend decades more enjoying their retirement.

But if you ask financial guru Suze Orman, the average person will fall very, very short. Instead of lasting decades, their savings will last about three years.

Right now, the median savings held in retirement accounts in the U.S. is just $65,000, according to a Federal Reserve study released in September 2020. Meanwhile, the government says households led by seniors 65 or older spend an average of about $47,600 a year.

If you want more than three good years, Orman’s book The Ultimate Retirement Guide for 50+ offers five essential rules to ensure a comfortable retirement.

1. Take a hard look at your finances

If you haven’t already, Orman says it’s time to buckle down and take a deep look through your budget.

Compare what you’re spending to what you’re saving. Trim the fat where you can and cut back on any unnecessary spending so you can allocate more to your retirement savings column.

Do you own a home and are you planning to stay in it through retirement? Then Orman says you need to come up with a plan now to ensure you’ll have your mortgage fully paid off before you retire.

Not sure how? A mortgage refinance at today’s still historically low interest rates could save you hundreds of dollars a month and make it possible to get out from under your home loan sooner.

2. Downsize your home

You may have plenty of sentimental reasons to want to stay in your current home, but if it’s more space than you need and you can make money off of it, you may want to 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 accrue much more interest than if you waited another 10 or 15 years.

“I don’t want you to wait till you’re 60 or 70 to sell this home,” she says. “I want you to downsize right now, so that you can start saving more money right now.”

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While some may hesitate to part with their family homes, a smaller space is easier to clean, cheaper to run, will cost you less in homeowners insurance and will be more accessible as you age.

3. Beef up your emergency fund

Financial experts typically recommend you have an emergency fund of at least three to six months’ worth of living expenses, Orman actually recommends you make that two or three years.

Yes, three years’ worth of expenses in an emergency fund. Her reasoning is that if the market ever takes a downturn, you’re not going to want to be withdrawing from your retirement accounts until it bounces back.

With a substantial emergency fund you’ll be able to get by until it’s once again safe to take out funds from your retirement account. If you need a little help setting up your emergency fund, you might turn to one of today’s convenient online financial planners.

4. Invest in a Roth IRA

To avoid paying tax when you take money out of your retirement account, Orman recommends you go for a Roth IRA account.

“Later on in life, you want to be able to take that money out tax-free,” she explains.

Because your contributions to a Roth account are made after tax, you won’t have to deal with deductions when you withdraw. 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’re not keen on making the big investment decisions yourself, you could open an IRA through a robo-advisor that will manage your retirement account for you.

One popular robo-advisor will even help you grow your savings by investing your “spare change” from everyday purchases.

5. Update your investment portfolio

Taking a “set it and forget it” approach to your investment portfolio rarely pays off. You have to regularly revisit your portfolio and make sure it’s still in line with your financial goals and timelines.

Orman recommends either stocks or exchange-traded funds (ETFs) that pay dividends. So even if the market sees a downturn, your investments will still provide you some income.

“If you happen to hit a patch where the market starts to go down, you want these stocks to still provide income for you,” she says.

Check in with your financial adviser to ensure your balance of cash, stocks and bonds is right for your retirement goals. Try to keep your costs down by using an investing service that offers zero-commission trades.

You might consider diversifying your investments by going way beyond stocks, maybe by putting some money into 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.