by Suze Orman
Then turn to the practical steps involved in closing down a business. Depending on your business structure, you may need to notify your state and local governments that you are no longer in operation. If you had employees, the IRS expects you to pay any payroll tax still owed, and you will need to let the IRS know of your plans to stop operation. Your accountant will be able to guide you through the paperwork. At the same time, closing down doesn’t absolve you from paying outstanding bills. If you can’t see your way to making good on those debts, do not run or hide. Hire a bankruptcy lawyer to help you stand in your truth. I do not bring up the topic of bankruptcy lightly. It is indeed a serious step with serious repercussions. But closing your eyes and hoping no one will “come after” you for unpaid bills or taxes is not standing in the truth.
At the website nolo.com you can find solid basic information on what you will need to take care of to properly close down a business, as well as a “Bankruptcy Center” that is a great starting point for understanding the ins and outs of that process.
And I want you to listen to me: When one door closes, another opens. This business is ending. That does not mean your life is ending. Nor does it mean there cannot be another business dream in the future. You are doing what is right for you—and your family—today. Be proud of your strength. And use that strength to propel you forward into your next career.
LESSON RECAP
FOR THE EMPLOYED
A large emergency fund has never been a more important career management tool.
Make sure you grab every dollar offered in a 401(k) match.
Never leave a job without another job lined up or a significant amount of savings that can sustain you for two years.
Raises are not an entitlement. Make your case by helping propel the business forward.
FOR THE UNEMPLOYED
Do not wait for the best job; take the best option that you have today.
Set your salary demands based on the current marketplace. What you made at your last job is not relevant.
Accept that to “afford” a lower salary, your family may need to reduce its spending dramatically, including moving to a less expensive home.
Going back to school must be based on a clear-eyed strategic assessment, not merely the fact that you are tired of looking for work or hope to “wait out” the bad job market by going back to school.
FOR ENTREPRENEURS
Have large cash reserves before you launch a start-up: an eight-month personal emergency fund and a separate business savings account equal to twelve months of your anticipated operating costs.
Keep your overall credit card balances (personal and business) below 30% of your outstanding credit limits.
Carefully consider your expansion plans. Trust your gut on what is the right move for you.
Stand in the truth if your business is not able to produce the revenue you need to be self-sustaining. Closing down a business is a sign of strength; going deep into debt—especially tapping personal assets such as your home equity—is the worst career move you will ever make.
A Note About the Retirement Classes
The rules of retirement planning—and living in retirement—are so critical and so complicated that I could not limit the information to just one class. Therefore, I have divided the subject into three separate classes aimed broadly at three different stages in life:
Retirement Planning in Your 20s and 30s. This class provides lessons on how to make the most of your most valuable asset: your age!
Retirement Planning in Your 40s and 50s. This class covers all the mid-course fine-tuning you must make at this critical juncture to ensure you will indeed reach your retirement dreams.
Living in Retirement. This class includes steps current retirees can take today to make the most of their money amid current record-low interest rates.
I encourage you to jump right to the Retirement Class that addresses where you are as of today. But I also hope you will circle back and read the other chapters as well. As I shared in the Family Class, the more we start talking to our loved ones about money the stronger we will all be. Reading the other Retirement Classes can be a way to start important conversations. It’s also a way of preparing yourself for what lies ahead—and a way to educate yourself about what your children and their children might be up against too.
The Money Navigator A Special Offer for Readers of The Money Class
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In The Classroom at www.suzeorman.com you will find a link and instructions to activate a free one-month subscription to The Money Navigator newsletter. This online newsletter includes Mark’s recommendations of no-load mutual funds and ETFs that invest in dividend-paying stocks. It will indicate what advice to follow depending on your age and where you are in your retirement planning—just as I’ve organized the retirement information in this book—and will help you build the right portfolio for you. To learn how to enter The Classroom, see this page of this book.
CLASS
RETIREMENT PLANNING
GETTING GOING IN YOUR 20S AND 30S
THE TRUTH OF THE MATTER
If you are in the early stages of your working life, the notion of retirement will no doubt seem like a hazy point on some distant horizon. Your ideas about retirement are probably shaped by your grandparents’ golden years or maybe even your parents’ if they have been lucky enough to reap the benefits of decades of labor and can comfortably transition out of their working lives. I have to tell you, your retirement will likely look very different than that of your parents and your grandparents. The concept of retirement in these days of the New American Dream is most definitely changing, no matter if you’re in your 20s or your 60s. But even as I am asking you to let go of assumptions about your postwork life, I need you to understand that there is one absolute, bedrock ground rule that will not change, no matter what is happening in the economic climate: You must begin planning for retirement from your first day on the job. Do not squander precious time because you can’t wrap your head around the concept of giving up money now for some theoretical notion of a life of leisure, half a century away. Let me show you why retirement planning needs to be a part of your agenda right here, right now.
The first truth to accept: You and you alone will be responsible for the quality of your life in retirement. If you think that the government, your employer, or any system currently in place is going to take care of you financially, you could not be more wrong if you tried. Let’s start with what is going on at work. Thirty years ago, 62% of private companies that provided a retirement benefit did all the heavy lifting by giving employees an old-fashioned pension. Employees didn’t have to save any money on their own, or figure out how to invest the money. The corporation did all that work and when you retired you were entitled to your pension. Simple as that.
Today, just 10% of private companies have only a pension as their retirement benefit. Instead, we’ve become a 401(k) nation: 63% of private-sector corporations that offer a retirement plan only offer a 401(k). Another 27% of employers offer a combo of a pension and 401(k). That means 9 out of 10 firms have shifted some or all responsibility for retirement planning onto your plate.
The story is a bit different in the public sector. Many government and municipal employers do indeed offer an old-fashioned pension. But as if I have to point this out, federal, state, and local entities are struggling to come to terms with some very serious budget shortfalls. And the massive costs of providing old-fashione
d pensions is a big expense that is coming under a lot of pressure. While pensions that have been promised to current workers will be honored, what we are already seeing is that new employees are increasingly being directed into a 401(k)-like plan rather than a pension, or are being asked to contribute a portion of their salary into the pension. The bottom line here is that even if you are a public-sector employee, chances are you too will soon be required to take more responsibility for your retirement security.
And it’s not exactly a fun or easy task. Even if you appreciate the need to be saving today for your retirement security, I understand the scars that have been left by the financial crisis and bear market. Unlike your parents and grandparents, who have also lived through profitable bull markets, those of you in your 20s and 30s have no muscle memory of what it feels like when markets rise. Being told a secure future depends on staking a lot of money—your money—on a system that you don’t have much faith or trust in is a tall order.
And let’s talk about Social Security for a moment. There’s actually some good news here. I know that many younger adults are convinced they will never see a penny from the system, given all the ominous talk about Social Security “going broke.” That’s just a lot of fearmongering. Please listen to me very carefully, for I want you to be in possession of the facts: If we don’t do anything to “fix” Social Security before 2037, we will run into a situation in which the system cannot pay out 100% of the benefits that are promised today. But that does not mean the system will pay out zero either. The fact is, benefits would basically have to fall by about 25%. In other words, beneficiaries would get about 75% of the benefit they are being promised today. Granted, a 25% or so reduction isn’t exactly cause for celebration, but it’s a long way from nothing. And if Washington ever decides to get serious about “fixing” the problem, there are some very reasonable options that aren’t nearly as dramatic or horrible as the fearmongers would have you think. Social Security is most definitely in need of tweaking, and yes, on some level those tweaks will effectively reduce the benefit you receive, but the benefit is not going to evaporate completely. Social Security will be there for you, though for some of you it may be at a reduced benefit from what is promised today.
But if you want to keep thinking Social Security won’t be there for you, I see that as good news too. As much as I want you to understand what’s really going on with Social Security, I am sort of glad you are skeptical about others providing for you in retirement. That should motivate you to get started on saving on your own. Let’s agree, then, to think of Social Security as what it was always meant to be: a safety net. It will pay out something. For you, it will be a nice income stream to add to your own savings. A side dish, not the main course. Consider that the average benefit for a retiree today is about $1,200 a month. The average benefit when you retire will of course be much higher given the path of inflation, but if you are here in my class we both know that the inflation-adjusted equivalent of $1,200 today in 40 or 50 years will not be the entire solution for your retirement dreams. So go right ahead, you have my full permission to assume Social Security isn’t going to exist for you. That should be plenty of motivation to focus on your 401(k) and IRA.
All that said, I understand how easy it is to put retirement planning on the back burner, especially when it is decades away and there are more immediate priorities—like paying this month’s bills. I know what you’re thinking, because I’ve heard it before: You tell yourself that you’ll just save more down the line when you’re making more. If that is the kind of thinking you’re indulging in, then you need to accept this truth: As you get older, saving for retirement becomes harder, not easier. This particular law of money is very simple: The more you make, the more you spend.
Just ask your parents, or an older friend or colleague. As you get older you will likely find yourself in the middle of a financial juggling act. Should your money go for the mortgage or the college fund you want to start for your young children? Speaking of college, you probably are still paying your student loans off. What about helping your parents, who have also been lousy at saving? And a vacation—you need a vacation—and new clothes! The list goes on and on—trust me, there will always be a long list of needs and wants competing for your dollars as you get older and your life gets more complicated.
Most of us, when we’re young (and some of us when we’re not so young …), opt for the immediate gratification of spending, which knocks retirement saving down the list of our so-called priorities and then we find ourselves in a horrible bind. I’ve seen this happen time and again: Just as you make the turn into your 50s you suddenly wake up and realize the finish line is fast approaching. That’s when the panic sets in. You realize that your years of neglect probably means you won’t be able to retire when you want, with the money you need. You desperately try to make up for lost time, but your money is already committed elsewhere and long-held habits are hard to change. I implore you: Learn this lesson before it’s too late. Retirement planning takes time and commitment—and it is never, never too soon to start. That is more true now than it ever was before.
I happen to think that those of you in your 20s and 30s could be the big winners in the coming decades. You have just lived through some very unsettling times. We all have. But the big advantage you have is that you don’t have big losses to make up for or years of mistakes to overcome. And you have a great deal of time to make your dreams into reality. Use your time wisely, stay strong and committed to living in the truth, and I am absolutely confident you can have everything you dream of.
I have organized this Retirement Class into four lessons:
Time Is Your Greatest Asset
Retirement Accounts Explained
How Much You Need to Save for Retirement
Investing Your Retirement Money
LESSON 1. TIME IS YOUR GREATEST ASSET
The single biggest favor you can do for yourself right now is to start saving for retirement. When you are young you can take advantage of the one resource you have in abundance: time. The longer your money has to grow, the more money you will have when you reach retirement. I wasn’t surprised to see a recent survey that asked people in their 50s what their biggest regret was when it came to retirement planning. The resounding answer: not starting earlier. Standing in your truth is often an exercise in imagining your life years from now and knowing you will be in a position to look back over your choices and say, “I am glad I did,” rather than “I wish I hadn’t.” Please take the lead from those 50-year-olds who say they wish they hadn’t waited so long to get serious about saving for retirement. Right now is when you write the script of your future. Commit to saving. You will be so glad you did. The fact is, the sooner you start, the less of your own hard-earned income you will need to put aside to reach your retirement dreams.
Let’s say at age 25 you start saving $416 a month for retirement in a Roth IRA. That works out to $5,000 over the course of a year, which is currently the max annual contribution at your age. And let’s assume you keep saving that $416 a month all the way until age 67 and your average annual rate of return is 6%. Why 67? Currently, that is the age at which you will be entitled to full Social Security benefits. If you were to start saving for retirement at age 25 under these terms, at age 67 you would have about $950,000 saved.
Now let’s go with your theory that you can afford to wait and you start saving later on. Let’s say you delay your retirement savings until age 45. If you invest the same $416 a month and earn the same average annualized 6% rate of return, you will have about $225,000 at age 67. The twenty years of lost time have cost you $725,000!
Another reason I want you to appreciate the value of getting started earlier is entwined with why I have used a 6% average annualized rate of return in the example I just ran through. Years ago, when I was first writing books for your parents, I used a 10% or 12% annualized rate of return, because in those times the economy and our markets were producing gains that strong. In fa
ct, the long-term average annualized rate of return for U.S. stocks going back more than 80 years is right about 10%. But you and I are standing in the truth of what is real going forward, rather than wishing for what we would like to happen. And I think using a 6% annualized rate of return is an honest reflection of what a well-diversified portfolio might return in the coming years, based on the fact that our economy is not likely to grow as fast. So if we plan for lower returns, getting an early start on saving becomes even more important than ever. It’s just another way you have to do more of the heavy lifting; when the markets were gaining 10% or 12% a year they did a lot of the “work” for you. At half that pace, your future retirement stash is going to rely more on what you manage to save.
Go to The Classroom at www.suzeorman.com:
To figure out what your retirement savings could be if you get started today and keep saving until you are ready to retire, use the Compound Interest Forecaster in The Classroom at my website. Please stand in the truth and use an expected rate of return of no more than 6%.
LESSON 2. RETIREMENT ACCOUNTS EXPLAINED
I want to make sure we are all on the same page about the different types of retirement accounts you can put money into in order to fulfill your dream of retirement. I have indeed covered these topics in great detail in prior books. If you are already up to speed on how 401(k)s, 403(b)s, and individual retirement accounts (IRAs) work, please jump ahead to the next lesson. For everyone else, here’s a quick rundown of what you need to know:
