In this episode, we’re looking at Suze Orman and what she claims you need to have saved to retire early.She says you need $10 million and that “$2 million is pennies.”I share…
- A look at Suze’s wild claims (and gold briefcase)
- The 3 things you need to retire on way less than what Suze says you need
- How to retire with more than $200k a year in tax free income on a $900k portfolio.
This is the My Money My Freedom podcast, where we unpack and simplify all things money so that you’ll always have more than enough to live your best life for life. Now here’s your host. Financial coach Susan Lassiter-Lyons.
Hoo, girl. Last week’s episode about Dave Ramsey generated a LOT of feedback.
Not gonna lie – I got some hate mail from people that are really into their baby steps.
But that’s ok. Because I also got way more good feedback so check out the episode if you want to know what all the fuss is about.
Because I’m a glutton for punishment, apparently, today’s episode is my hot take on that other opinionated financial guru Suze Orman.
A few years ago, Suze Orman caused a media and social media firestorm when she claimed in a podcast that you need $10 million dollars minimum to retire early.
She also said in that podcast that and I quote…
“Two million is nothing,” she said. “It’s nothing. It’s pennies in today’s world, to tell you the truth.”
Initially, I thought she just must be out of touch since her retirement consists of private jets and her own private island in the Bahamas.
But then she doubled down on that figure and other financial ‘gurus’ jumped on the “two million is nothing” bandwagon causing millions of middle aged women coast to coast to suffer a collective panic attack.
I know because I’m the financial coach who is still dealing with the aftermath of that ridiculous claim.
If You Want to Retire Stress Free You Need Less Than You Think. We don’t have to accept the financial guru’s advice at face value. We can run the numbers and see what works best for our lifestyle.
The main thing we need to remember about Suze Orman and Dave Ramsey and all the other financial gurus is they make money selling you things, not telling you things.
Suze sells books, legal documents, wills, videos and DVDs, and even a fancy gold box to keep all your documents in.
Looking at the picture of it on her website it also holds your credit cards, jewelry, cash, passport, and what looks to be poker chips.
Seriously. It’s like a gold briefcase that Jane Bond would carry on the private plane on the way to Suze’s private island.
But the bigger problem I have with Suze is the advice she gives.
It’s not all bad – like with Dave Ramsey there are certain things we definitely agree on – like the advantage of Roth IRA’s over traditional IRAs, term life insurance over whole life, but the one we don’t agree is a biggie.
The amount of money you need for retirement.
So, let’s all take a collective deep breath and relax while I share exactly how you can retire on far less than the $10 million Suze recommends.
Heck, even less than the $2 million she considers pennies.
All it takes is rethinking your retirement portfolio’s …
- Account Type
So, let’s break this down starting with Account Type.
The account is the container that holds our retirement investments.
Choosing the account type is just a question of when you pay taxes on your retirement contributions.
If you defer your taxes until you’re retired, you’ll choose a traditional IRA or 401(k).
If you prefer to pay your taxes now instead of playing tax roulette, you’ll choose a Roth IRA or 401(k).
Suze and I agree that a Roth account is by far the better choice for retirement investing since you get to take your income tax-free in retirement and avoid government mandated distributions.
With a Roth you can keep your portfolio intact and just live off the income as long as you live.
It also becomes an inheritable asset meaning you can leave it to your heirs creating legacy wealth.
Just think how different your life would be if your favorite Aunt left you a million dollar portfolio of income-producing stocks.
My nieces and nephews listen to this podcast so take note kids.
Back in my day – that’s a phrase I thought I’d never be using but here we are.
Anyhoo back in my day, before 1997, Roth IRA’s weren’t even a thing yet so my only choice was a traditional IRA which is the worst.
Yes, I got to contribute pre-tax money but when I realized I was just deferring taxes until retirement, AND I would have to sell off 4% of my investments every year to get the income to live I realized what a scam it is.
The good news is that many employers now give you the ability to contribute to either a traditional or Roth account in your 401(k) so check with your benefits administrator to see if you have that option.
If you do, consider contributing to the Roth so that you set yourself up for tax free income in retirement.
If the account type is the container, allocation is how we decide what goes in it.
Most financial planners suggest a 60/40 allocation to stocks and bonds.
Suze recommends subtracting your age from 100 and putting that much in stocks. That would mean that only 45% of my portfolio would be invested in stocks. For me, that’s way too low.
It’s also way too low for someone my age who needs to catch up and pump up the jam in the retirement portfolio on a compressed timeline.
I prefer an all-stock portfolio with a 50/15/35 allocation to income stocks, value stocks, and growth stocks.
As you get closer to retiring, the income allocation will increase and the growth and value allocation will decrease since the goal is to live off of the income our portfolio produces.
Now we’ve got our Roth and a significant portion of our investments allocated to income. And we want to maximize the money that our money makes.
Yield is the percentage of income our money makes from dividends.
For instance, a share of stock purchased for $20 paying $1 in annual dividend income yields 5%. You just divide the annual dividend of $1 by the price you paid for the share of $20. That’s how you calculate the income yield of your stock.
The goal is to invest in high-yield dividend stocks, reinvest the dividends, and let that money grow and compound over time.
I always say “I love the money that my money makes but I love the money my money’s money makes even more.”
The bad news is the average yield from the stocks that make up the S&P 500 is about 1.5%.
Decidedly not high-yield.
On the other hand, the current yield from AT&T stock is around 7%.
So that other advice that Suze and Dave and even Warren Buffett give about investing in an S&P 500 index fund and calling it a day?
Instead, consider investing in individual stocks using an initial target yield of 7% and collect your income (and raises) over the years. You’ll eliminate the fund fees that way, too.
Investing this way, you’ll typically need much less than $10 million to retire stress free.
And since Suze says that $2 million is nothing, let’s use that number to see if if our future self will be dining on great sushi or sharing the cat’s food.
If you have $2 million and invest it in a traditional IRA or 401k way deferring taxes, you’ll be required by the government to sell off 4% of your investments every year to get income to live in retirement..
That produces $80,000 every year which will then be taxed at whatever the future rate is. (That’s tax roulette.) If it’s 20%, then you net 64,000.
Even though Suze can’t live on that, many people without private jets and islands can.
But we can do better.
If we take that same $2 million and invest it using a Roth in dividend stocks yielding 7%, it produces $140,000 every year tax-free. And we don’t have to sell a single share to get it.
Here’s how you can get even more from less if you have enough runway.
Start contributing $500 a month to a Roth and invest it in dividend stocks yielding 7% to start and let it grow and compound for 25 years.
In year 25, the portfolio will be worth $925,109.05 and produce tax-free dividend income of $228,806.06.
The income is higher because the average yearly rate of dividend growth (also known as your raise) is 5.4% so over 25 years the 7% yield grows to 24.73%.
The decisions you make today about your retirement investments impact future you.
Make good ones.
Thanks for listening to My Money My Freedom. Visit our website at mymoneymyfreedom.co and follow us on Instagram @mymoneymyfreedomhq