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American Morning

The Big Question: Is Retirement at 65 Now Just a Dream?

Aired March 07, 2002 - 08:50   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
PAULA ZAHN, CNN ANCHOR: The Big Question at this hour, is retirement at 65 now just a dream? What can we do, though, to protect ourselves? Joining us now, Suze Orman, personal finance expert and author of the best selling book "The Road to Wealth." She only seems to know how to write best-selling books.

What a track record you've got. Nice to see you in person for a change.

SUZE ORMAN, AUTHOR, "THE ROAD TO WEALTH": Thanks, Paula.

ZAHN: First of all, I don't want to spend a lot of time debating the Democratic plan now and the Republican plan, which is a little less formed at this point. How much help are either one of these plans going to give retirees out there?

ORMAN: I don't think it's going to give them a lot of help at all, because you see, once you're already in a retirement plan, you have to remember this, more people lost money than just Enron people. There are people all throughout the United States last year in their retirement plans that lost 60 percent, 70 percent. Why? Because they weren't invested appropriately. They didn't have diversification. They wanted to go to for the gusto.

ZAHN: Go for the gusto. In other words, they were greedy?

ORMAN: They were greedy, I have to tell you. So therefore, would-be plans and these suggestions, help people know. We have to educate people, not after they're working, but in high school, in college. We should make it mandatory that people have financial licenses to understand how to drive down that road to wealth to get them to where they want to go, but they don't know what to do. So when they don't understand mutual funds at all, they're always going to invest in their employer's plans, not because they're forced to do so, but they don know what to do except employee stocks. That's all they know.

ZAHN: Well, it's the convenient thing to do. It's an easy thing to sign that little line on the form that makes you do that.

ORMAN: We have to educate them in a different way. I don't think any of these solutions are going to solve the problem. Will they help? Yes. Will they have solved the problem? No.

ZAHN: Name three of the smartest things that young people can do today to prepare for retirement.

ORMAN: Stay out of credit card debt forever. Own your own car outright by the time you are 62, at the latest, and start investing today for your tomorrow. After you're out of credit card debt, you should be funding your 401(k) plan to the max. And, if you qualify, a Roth IRA as well. Start saving. Time is the most important financial ingredient in any financial freedom recipe.

ZAHN: How about 50-year-old folks, who haven't made those kinds of plans so far?

ORMAN: Then their number one priority, seriously, if they own a home, which most people do throughout America, their number one priority should be, pay off your mortgage sooner than later, because your largest bill per month is your home mortgage. And your home mortgage is going to be the same whether you owe $300,000 and then you start to pay it down and now you owe 200 or 100. You're still going to owe $2,500 a month or whatever it is. Get rid of that mortgage payment, and then your money will go farther for you.

ZAHN: All right. Now on to the questions of our viewers out there. The first one comes from Gary in Buffalo, New York. "I am a married 48 year old male. My wife is a homemaker. We have two children, ages nine and 16. We have $25,000 in savings and $65,000 in a 401(k). I have been making the maximum contribution the last three years. I also will receive a company pension. Any suggestions? What should I do with my savings?"

Yes, you see, you always need to have an emergency fund. So $25,000 really for two people with children isn't that much money of an emergency fund. So his tendency is going to be take that $25,000, and I don't want to just make 1 percent or 2 percent on it. He's going to think, let's invest it in the stock market. Then all of a sudden, Gary gets sick or Gary loses his job, and then he has no money, and then he's got to take his money out of the stock market, and then all of a sudden, before you know it, he has credit card debt.

So in this situation, keep his savings, the money, in a money market fund safe and sound. He should have at least eight months to one year of an emergency fund, family of four here.

Next, he should continue to contribute the max to his 401(k). The reason that he only has $65,000 in there, he only started when he was 45. Gar, why didn't you start when you were 30, 35, 40? Now then you'd have $200,000 or $300,000 in there. So he has to keep going. If he qualifies, he should also open up a Roth IRA as well. And Gary is going to have to decide, is he going to put money away for his children's college education, or is he going to put the money that they need for their own retirement? In this case, I would opt for their own retirement over their children's education.

ZAHN: Why is that?

ORMAN: Because the kids can get financial aid, the kids can get student loans. He's 48 years of age. In 10 years, if he keeps funding his children's education, he's not going to have much more than he currently has. He's going to be 58, 60. His kids are going to be through school with a whole lifetime ahead of him, and here he is at 60 with no money. It's not going to be good, Paula.

ZAHN: Let's move on to Mary Anne Daniel's question. She joins us from Manchester, Connecticut this morning. "I had approximately $150,000 in mutual funds and lost around 37 percent when the market down. I am 65 years old and still have these funds. Should I stay the course and hope the losses will be recovered or, at my age, considering this is my total assets, get out and avoid further losses?"

ORMAN: Do you understand, this is what I was talking about. We have a 65-year-old woman who has invested in such a way that she, without the pressure of a corporation saying buy this Enron stock, there she was, and she lost 30 some odd percent of her own money because she wasn't invested properly.

Very quickly, don't look back at what you had and try to make up for that. Look at what you have, decide, is what I have where I want it to be invested, because it's all you have now. If it's not, change your asset allocation mix or your portfolio. Don't try to make up for what you lost. Go ahead as if today is the first day of your financial life.

ZAHN: Where is the safest place for her to put it? In mutual funds?

ORMAN: No. That's where she lost it. If she want safety, individual bonds, series I bonds, not bond funds, not variable annuities, not universal life. For any money that is at least 10 years from now she needs can go into growth mutual funds.

ZAHN: You may have changed some futures here this morning on AMERICAN MORNING.

ORMAN: Let's hope so, Paula..

ZAHN: Suze Orman, it's a delight to have you on the air. I'd love to have you come back. It was very helpful to all of us.

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