The R-word looms large in the headlines these days. If you’re feeling a little anxious about your finances, well, we don’t blame you. That’s why we sat down with wealth advisor Ed Butowsky. He’s the author of the new best-seller “Wealth Mismanagement: A Wall Street Insider On the Dirty Secrets of Financial Advisers and How to Protect Your Portfolio,” and he gets candid about the Federal Reserve’s recent rate cut, how to stay calm in the face of a potential market swings, and what the heck an inverted yield curve is, anyway. He also gives us his suggestions for tried and true stock sectors that can weather any storm.
In Mailbag, Jean and Kathryn talk through tips on reducing your credit card debt in the face of competing priorities — like student loans and your mortgage. And in this week’s Thrive, Jean breaks down the concept of “traditional retirement” vs. “phased retirement,” in other words, how you can pull out of the workforce slowly.
This podcast is proudly supported by Edelman Financial Engines. Let our modern wealth management advice raise your financial potential. Get the full story at EdelmanFinancialEngines.com. Sponsored by Edelman Financial Engines – Modern wealth planning. All advisory services offered through Financial Engines Advisors L.L.C. (FEA), a federally registered investment advisor. Results are not guaranteed. AM1969416
Jean Chatzky: (00:06)
HerMoney is brought to you by Fidelity Investments. We want you to feel confident about investing so that you can make your money work just as hard as you do. Learn the ropes without the jargon at fidelity.com/demandmore. HerMoney comes to you through PRX. Hey everybody, it’s Jean Chatzky. Welcome to HerMoney. Welcome to HerMoney that we are taping on the day that the Federal Reserve cut interest rates for the second time this year after a long hiatus in any sort of interest rate movement for quite some time. It seems like a really good day to be in the studio taping the show that we’re about to take because many people believe that things like the Federal Reserve moving on interest rates are signs that the economy might be a little bumpier, for lack of a better word, than we might think. And that may be we are headed to a recession. We are going to dig into all of this. We’re going to dig into what recessions are, why they happen, how the economy works, the fact that all of this is cyclical and we’re going to do it with our guests, Ed Buttowsky. Ed is a wealth advisor. He’s a former senior vice president at Morgan Stanley. His new book, Wealth Mismanagement is now a number one bestseller on Amazon. Ed I’m really, really glad you’re here today.
Ed Buttowsky: (01:50)
Well, I am, too. Thanks for having me.
Jean Chatzky: (01:51)
Thank you so much. So let’s start with the news. The federal reserve cut interest rates again, what does this mean for me and my audience of individual savers and investors?
Ed Buttowsky: (02:05)
Yeah, it’s an direction for us to realize. And the most important thing is people need to understand that when the Federal Reserve cuts interest rates, they can really do one of two things, the Federal Reserve, they can raise interest rates or lower interest rates and they do it on what we call the short end of the curve. So think about money markets when we’re talking about this. So the government has decided that the economy is so slow that they needed to cut rates to stimulate the economy. That’s a big deal because we’re already at really low rates and now they’re saying let’s cut it even more, which should be a little nerve wracking for everybody.
Jean Chatzky: (02:45)
Does this mean that we either are in a recession or headed for a recession?
Ed Buttowsky: (02:52)
Well, the definition, and this has been tossed around a lot and it’s a great question, Jean. The big question is, what is a recession? Well technically speaking, a recession, there are two consecutive quarters of negative growth in the economy, and we call that the GDP growth.
Jean Chatzky: (03:09)
GDP, gross domestic product.
Ed Buttowsky: (03:12)
Exactly. The gross domestic product. And that comes out every quarter. Now, oftentimes we didn’t know we were in a recession, in this country, until we were out of it. Most recessions don’t take a very long period of time. There are two quarters in a row of negative growth, but what we’re having now might not be clearly defined as a recession, but we’re having a dramatic slowdown in the world economy and that is starting to really impact the US economy. So anything that we’re doing right now, you need to really be careful in every market because the government is telling, us things don’t look good for the economy. And that sometimes bleeds over into the stock market.
Jean Chatzky: (03:51)
What does it mean for individuals that things don’t look good for the economy? I mean, I look at unemployment and we seem to be doing just fine as far as jobs and job creation is concerned. We look at inflation, it’s relatively low. We look at consumer confidence, which has been really strong. So what is the fact that our growth has slowed really mean to me as an individual?
Ed Buttowsky: (04:20)
Yeah. And, again, those are excellent points because that is what we are in right now or have been. But in investing, as we know, we’re always looking 6-9 months out and that’s where stock prices start to move 6-9 months ahead of earnings and economic data. So everyone who’s an investor, whatever’s happened right now, that’s great and interesting. But we as investors are always looking, what’s going to happen 6-9 months down the road. So because we’re seeing interest rates being cut, that is a sign that things are going to get weaker. So maybe we’re going to see better sales come Christmas because they’re going to have to get rid of inventory because things are going to be slowing.. Even though the employment numbers are good. That means, and we’ll probably see a good number around Christmas time, but this is really looking out to, the first quarter is going to shock a lot of people 2020. That’s what we’re starting to look at now is what are things gonna look like then? And that’s what things are being priced to at this point.
Jean Chatzky: (05:17)
It’s amazing to me how things happen and we don’t quite understand that they’ve happened until after it’s passed. But I think back to the great recession and the fact that the government told us that recession was over in June of 2009 when in fact household income didn’t hit the level it had hit in June or July of 2007 again until 2017. So as we go through these cycles, I want to talk about how individuals like us who can’t control any of this should be managing our money in terms of our spending, but also should be managing our investments. So let’s start with the spending, the budgetary picture. At a time like this. What’s the advice for people as far as, I guess, shoring up your finances?
Ed Buttowsky: (06:19)
Yeah. I always advise people to have at least a year’s worth of money that they needed to live off of in money market.
Jean Chatzky: (06:28)
In money market means in savings, in a savings account.
Ed Buttowsky: (06:31)
exactly. Have it in savings, have it put away. And then once you get down to the 6-month level, so let’s just say you put aside $60,000 and that’s what you’re going to have for the year that you’re going to spend. Once you spent down to 30,000 then you replenish it back up to 60,000 ’cause you never know. You always want to make sure that the moves in the market don’t impact your lifestyle. Right. And I’ve seen way too many people just live and breathe with the ups and downs of the market and that’s a terrible way to live your life. And you know, you might end up, if the markets are doing well and the stock markets are growing and you don’t have as much money in it, you might miss out. But I gotta tell you, Jean, the pain you feel from missing out on some possible upside pales in comparison to the pain you’re going to feel when you don’t have money to live off of.
Jean Chatzky: (07:22)
Absolutely. In terms of our portfolios, I hear a lot of talk about recession-proofing your portfolio. If we’re regular 401(k) investors, we’re putting money into our portfolios every single time we get paid, or maybe we’re making an automatic contribution into an IRA, or we’ve got a brokerage account that we’re putting money into on a regular basis. How does our behavior need to change at this point? Or doesn’t it?
Ed Buttowsky: (07:51)
Well, it depends on how old you are. You know, if you’re someone who’s getting close to retirement, you’re going to be looking at your 401(k) plan a lot differently than somebody who’s in the early stages of savings.
Jean Chatzky: (08:03)
So let’s break it down because we know that our listeners are a combination of millennials, Xers, and boomers, and they’re pretty equally split. We’ve got a third, a third, a third. So let’s do some deep dive analysis for each of those cohorts. Alright. For my millennial listeners who have a long time before retirement, what should they be doing at this point?
Ed Buttowsky: (08:30)
Without any question. And I’m gonna use a term I love using ’cause it makes me sound smart. But if you did a regression analysis on investing, anybody who has 30 years or more to invest, they should be a hundred percent in equities.
Jean Chatzky: (08:49)
A hundred percent?
Ed Buttowsky: (08:50)
One hundred percent. That’s what Jeremy Siegel out of Wharton, he was my professor, and they did a regression analysis. I’m actually, I could actually tell you that he actually said it should be a little bit more than that, but historically, because a lot of people don’t realize this, that there’s only been 1 10-year time period in history, rolling 10-year time periods where you lost money in the stock market. That was 1927 to 37. So if you’re a longterm investor, you put your money in equities, and I’ve been retiring people for years from companies, and the people who retire with the most money saved their money by putting it, put their money in equities. Now as they get closer to retirement, things start to change, but I know we’re going to get to that.
Jean Chatzky: (09:32)
We’re going to get to that. Just pushing back, there’s a rule of thumb that says you shouldn’t have 100% in equities. You should take 110 minus your age, and that’s the amount that you should have in equities because stocks and bonds tend to move in opposite directions and you want to have that sort of asset allocation. What do you say to that?
Ed Buttowsky: (09:57)
I don’t agree with that. Now very few people are going to have 100%, I’m just saying what history shows us. ‘Cause you also then have to overlay on top of that the psychology. And that’s another part to this because some people won’t do it. I personally don’t have 100% of my money and equities and never have.
Jean Chatzky: (10:16)
Ed Buttowsky: (10:18)
I’m a little wimpy. Maybe that’s why.
Jean Chatzky: (10:21)
I mean, I don’t either, right? I’m not even close to 100% in equities. I’m much closer to 60/40 and I’m sure you would look at me and say, well that’s not nearly enough, but we’ll get to people in my age cohort in a second. I do think there’s the sleep factor, right? You gotta be able to put your head on the pillow at night and close your eyes.
Ed Buttowsky: (10:42)
Right. And I’m just saying that history has showed us that going back in time, that it says that if you have 30 years and you’re a moderate risk taker, that’s what you should do. If you’re not a moderate risk taker, if you’re a low risk taker, then you should have, you know, it could be somewhere around 80/20, but history that shows how to get the best returns.
Jean Chatzky: (11:00)
And when we’re talking about equities, what kind of portfolio of equities?
Ed Buttowsky: (11:05)
Well, in a 401(k) plan, as we’re talking about, you’re limited to large cap growth, large cap value, small cap growth, small cap value. Those are the choices they give you.
Jean Chatzky: (11:16)
Sure, but how should you diversify it? How should you spread it out?
Ed Buttowsky: (11:18)
You should be pretty equal throughout all of them, but less than small stocks. The smaller stocks are going to give you a lot more volatility, meaning the ups and downs. So when the market does well, you might do better, but when the market goes lower, they oftentimes sell off more. So the bigger companies are where you want to concentrate and have a little bit more, have less risk in those.
Jean Chatzky: (11:41)
What about buying a total stock market index fund?
Ed Buttowsky: (11:44)
That’s something that a lot of people do. I have no problem with that. But if you want to diversify between sectors, that’s one thing. But a lot of these 401(k) plans and Fidelity’s got some great, you know, choices in those 401(k) plans. You can buy multiple large cap stock funds and feel very comfortable. There’ll be managed well.
Jean Chatzky: (12:04)
All right, let’s move on to our Xers. They have a little bit less time until retirement, right? I am the oldest Xer and the youngest boomer. I’m right on the cusp. I was born in 1964 which makes me, I guess, a bit of an anomaly there, right?
Ed Buttowsky: (12:19)
You are. You’re absolutely right. ‘Cause it’s 46-64.
Jean Chatzky: (12:23)
So I’m on the cusp. What about for Xers who are up to 53 years old at this point? So they’ve got 15 years, maybe 10 ish, 15 depending on how long they plan to work.
Ed Buttowsky: (12:35)
Well, you got to lend me this. I think 60/40 is a great, but look, here’s the other problem with being too conservative, and I’m just going based on history, and I’ve done this a long time, and the way to do this is you’re not going to also, you know, when you retire, that doesn’t mean you’re dying. We’re going to live a lot longer than you know, most people you know, you think. So when you retire, let’s just say you’re retiring and you.’re going start pulling money out of your 401(k) at the age of 65. I mean you probably, in most cases, have another 20 years to live. So getting too conservative at the wrong time is a problem. And I think it goes back in all the work I’ve done, it goes back to a lot of education about understanding what to expect from these investments and most people don’t know what to expect. If you asked most people, Jean, can you lose all your money in the stock market? You’ll see a lot of hands go up. And that’s what we have to do is we have to educate people. And that’s what’s so great about your podcast is that you’re teaching people this so that makes them better investors.
Jean Chatzky: (13:38)
There is a belief that’s held by not a small number of people, and not a small number of women, that investing is akin to gambling.
Ed Buttowsky: (13:48)
Jean Chatzky: (13:49)
Or that investing in trading are the same thing. What’s your definition of investing?
Ed Buttowsky: (13:55)
I mean, when I think of investing, I look at what I would put my money in and partner in the growth of those companies and I don’t ever buy something and look to sell out of it in any period of time. Our typical portfolio, you know, averages less than 5% turnover. That’s investing. It’s something that I would look at and say, would I want to partner with the board of directors of this company and stay there for a long period of time?
Jean Chatzky: (14:23)
Let’s not leave the boomers hanging. Alright. What’s the prescription for them at this point in time? I mean, they are close to retirement are 10,000 boomers who turn 70 every single day in this country. So many of them are already retired.
Ed Buttowsky: (14:39)
Well, and again, that’s going to go back to how much money they spend. And everyone’s gonna have their own individual analysis that has to be done, but these boomers have to realize they’re not going to die tomorrow. Okay. These people are, generally speaking, are going to live to be about 80 to 90 years of age. And maybe even longer than that and this money has to grow to maintain their standard of living or whatever that lifestyle is.
Jean Chatzky: (15:08)
And it’s not going to do that in the bank.
Ed Buttowsky: (15:10)
It’s not going to do it in a savings account and oftentimes people can’t retire. That’s the sad thing and I’m sure you’ve addressed that many times, that it gets really tough to retire. That’s why people need to be in things that can grow and the only way they’re going to be able to handle it is if they educate themselves and understand that there’s going to be days where the market’s down 3% and that’s not the end of the world.
Jean Chatzky: (15:33)
We’re going to take a quick break here and remind everybody that her money is brought to you by Fidelity Investments. Fidelity is all about helping you demand more from your money and one way they’re doing that is by paying you more on your cash. Now at Fidelity, when you open a new retail brokerage or retirement account, your cash automatically goes into a money market fund where it can work harder for you just to know you’ll get this benefit automatically and your cash goes into a money market fund unless you choose another cash option. For more information and the current rate, go to fidelity.com/cashvalue. You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the federal deposit insurance corporation or any other government agency. Before investing always read a money market fund’s prospectus for policies specific to that fund. Fidelity brokers services LLC. And we’re happy to be back with Ed Buttowsky, wealth advisor, author of the new book, Wealth Mismanagement. When we were chatting before the show, you rolled out with kind of a crazy statistic and I wanted to ask you to break it down. You said that a whopping 97.5% of people have broken portfolios. What’s that mean?
Ed Buttowsky: (16:58)
Over the years, people have only invested in the stock market or bond market and the computer systems that are used trading today, where you used to be able to diversify your holdings by putting them in the international markets. So when I say the international markets, I’m talking about other mature, developed markets and you can also invest in the emerging markets. And years ago when I first got into this business, you could invest in those and have a diversified portfolio because the risks were different. Today it doesn’t work that way because computer systems and communication systems are so fast. I mean, think about how quick we can speak to someone on a phone and get things done on our computers. Well, because of that, things move in lightning speed. So the moment something happens, for instance, in Hong Kong, it’s immediately reflected in the United States. So the diversification isn’t there. The term that we use as correlations. And a correlation is just very simply how one investment moves up and down with another. Today, those developed markets move almost identical to the US market.
Jean Chatzky: (18:10)
So what does that mean? Does it mean that we no longer need to hold international stocks?
Ed Buttowsky: (18:15)
In some cases that’s true, so when I say 97.5% of all portfolios are broken, that’s because they don’t have enough investments that have different risks. That’s the key.
Jean Chatzky: (18:26)
I think what I’ve come to understand about my audience is that although some people like to get into the weeds, picking stocks and picking bonds and picking mutual funds that they picked by doing a lot of research, there are many of our listeners who just don’t have time for that. We want to put our money in, we want to be passive, we want to do it the right way, but we’re not going to dig in. For those types of investors, how do you fix this problem?
Ed Buttowsky: (18:59)
The best thing a 401(k) investor can do is be heavy or light in the equity markets, have some bond exposures, and some of those are your short term bonds and longterm bonds, because they behave very differently as you know, depending on interest rate moves and have some international as well.
Jean Chatzky: (19:18)
Okay, let’s come back and let’s talk about this particular time in the market. Markets are as high as we’ve seen them in many cases. They haven’t gone very far in the last year. They’ve sort of been on a treadmill for the last year, but now we’re hearing talk of recession. What’s the move?
Ed Buttowsky: (19:42)
Well, the move right now, the stock market, if you were to take some of the unusual activity recently, and that is stock buybacks. A stock buyback is when a company decides to buy their own stock and when they do that and if their stock goes higher, that helps the stock price earnings. If you were to take that out, stocks today are somewhere close to being 26 to 30% over valued based on expected earnings. So if you’re going to go buy a house, and he said, well that house is about 30% over value, you might not buy it. Now some people will say, well, it’s 30% over value, but I think it could become 40% over value. That’s not what people should do. But a lot of people are doing that. I believe the stock market has a much better chance of going lower from here than higher.
Jean Chatzky: (20:37)
So what does that mean for individual investors, for those millennials who have that 30 years to go, for the Xers who have the 15, for the boomers who have 30 more to live? Are you saying sell?
Ed Buttowsky: (20:49)
No, I’m not saying that. I’m saying this is going to happen and you need to be prepared for it. The millennials, they should just worry about working and adding more money as that price goes lower. And as the market goes lower, hopefully their company is matching and they’re going to end up being richly rewarded if history proves what it’s done in the past and everyone should look at it from that standpoint. Just be prepared, if you’re a 401(k) investor, that things could get ugly for a little while.
Jean Chatzky: (21:16)
The people who really suffered during the last big market downturn were the people who sold and didn’t get back in.
Ed Buttowsky: (21:25)
That’s right, and it’s really remarkable. I’m happy you brought that up because there wasn’t a good reason to sell. Things were undervalued. In fact, the stock market in April of 2009, based on expected earnings, and that’s what we judge stocks on, is what they’re going to earn, based on expected earnings, the stock market was 40% undervalued. And again, today we’re about 25 to 30% overvalued. Now people will argue different. Are we overvalued, undervalued? We’re overvalued right now and we have a much higher probability of going lower. So if you’re a 401(k) investor, don’t sell, just be it kind of excited. If things go lower because your company is going to match and you’re going to put more money away at a lower price.
Jean Chatzky: (22:08)
It’s the opportunity to buy more shares of the same company on sale.
Ed Buttowsky: (22:12)
Jean Chatzky: (22:13)
How do we keep our emotions in check as we do it?
Ed Buttowsky: (22:17)
That’s difficult. And that’s why at the very beginning I mentioned about education. The more you know, the better you’re going to be prepared for a pullback in the market. How do you keep your emotions in check? Just know that it’s going to happen and if you’re a longterm investor, it’s going to happen many, many times in your life. But don’t be too concerned about it.
Jean Chatzky: (22:36)
I want to hit on three quick moves as we wrap this up for people to consider as they try to quote unquote “recession-proof” their portfolios. We hear a lot of talk about rebalancing, which we know everybody says they do and very few people actually do. What is it and when should you do it?
Ed Buttowsky: (22:57)
So rebalancing is a very important thing for all investors to do. Now, In order to do it, you have to first lay out what percentage of your portfolio you want to have in certain categories.
Jean Chatzky: (23:09)
Your asset allocation or broader than that?
Ed Buttowsky: (23:12)
No, I call it asset allocation in terms of how much you want to have in stocks, how much one I have in bonds. And then you decide, inside the stock category, what percentage you want to have in domestic stocks or how much you want to have an international. So in the stock portion, if you said, I want 60% of my stock money to be in US stocks, and if, through the growth of the portfolio, it became 70% well it’s probably time to sell back to 60%. Same thing with the bond market as well. You can actually buy and sell bonds just as easily as you can stocks, but you have to set out at the very beginning, what we call an investment policy statement, called a roadmap. Call it just a plan. But everybody who’s an investor has to have a plan and know exactly what percentage they want to have in each category.
Jean Chatzky: (24:07)
Unless you’re in a target date retirement fund where they do it for you.
Ed Buttowsky: (24:11)
Jean Chatzky: (24:12)
Second move is, as you said, make sure you’ve got that emergency stash. Make sure you’ve got 3-6 months. I think you were more comfortable at 6 months salary in case your job gets cut.
Ed Buttowsky: (24:24)
I’m even a little wimpier than that. I want to go a whole year. Have a year’s worth of your money put away if you can. Not everybody can. I know that, but if you can, because when it happens, you just don’t want that scary feeling, that sleepless night of worrying about, Oh my goodness, I’ve got to pay this bill, I gotta pay that bill. You can’t live that way.
Jean Chatzky: (24:43)
Right. And the third thing for those folks in our audience who do pick stocks or do pick sectors, you point to three areas that tend to do well even if the economy falls flat. Healthcare, liquor and tobacco, and wireless telecom talk about this.
Ed Buttowsky: (25:04)
The liquor and tobacco, the idea is that people are also not going to give that up and they tend to be recession-proof. Okay. Although they should certainly think about giving up those, but most people won’t. So they tend to do pretty well. And then on healthcare it’s obvious where, you know, unless there’s a major healthcare bill change, we’re going to, you know, make sure that we take care of our health. But that’s the way to look at it, Jean is exactly, what is it that we can do that we can’t do without? And those will tend to do well. However, the market goes down, these will go down. Also, don’t get frustrated. Just get excited. All right. That’s the way to look at it. If you had more money to invest, you do so.
Jean Chatzky: (25:48)
Ed Buttowsky. The book is Wealth Mismanagement. Thanks so much for coming in.
Ed Buttowsky: (25:56)
Thanks for having me.
Jean Chatzky: (25:56)
HerMoney’s Kathryn Tuggle has joined me in the studio. Thanks for teeing up that guest. You’ve known Ed since your days at Fox News, right?
Kathryn Tuggle: (26:04)
I have he’s a great guy. I always love talking to him.
Jean Chatzky: (26:08)
Well, and I feel like it was a little bit of serendipity. Having him here on the day rates moved. It was just perfect. We’re going to roll this episode out very quickly and make sure people get the information that they need.
Kathryn Tuggle: (26:19)
Absolutely. I feel like how to protect my money during a recession is a common theme that I hear from so many of our readers.
Jean Chatzky: (26:27)
Yeah. Yeah, so he was terrific. I appreciate it. What do we have in today’s mailbag?
Kathryn Tuggle: (26:32)
Our first note is from Newbie in California. She writes. The HerMoney podcast has really helped me a lot in understanding the current financial landscape, especially since I had little knowledge about this growing up. I’m currently 30 years old and have recently started investing money for retirement. I feel a little behind after 10 years in school, so I’m trying to catch up. With my 401(k) and IRA, I’m contributing around 11% of my income to retirement and I’m trying to work up to 15%. I’ve also opened an investment account for more growth. My goals are a house and saving enough for retirement. I don’t feel totally confident about playing the market and investing in individual stocks. Most of my money is in mutual funds and ETFs, but I’d like to change that if it’s advisable. Is there a safe allocation of individual stocks that could be recommended for a portfolio for a beginner? Any tips would be great.
Jean Chatzky: (27:22)
Here’s what I like about this question. That somebody who says they’re not quite ready to invest in individual stocks, but wants to do it, is willing to dip a toe in the water and start to get your feet wet. I think that’s terrific. I also think that having the bulk of your portfolio in mutual funds and ETFs is the right move, at least while you’re getting started. And that’s because if you are going to build an entire portfolio of individual stocks, you’d need at least 12 to 20 individual stocks to get the sort of diversification that you can get from mutual funds and ETFs. So here’s what I’d recommend. I’d say pick up a book on buying individual stocks. Pick up a book by Jason Zweig. Pick up a book by Jim Cramer. Pick up a book by any one of these experts who make their living picking individual stocks. And then pick an individual stock. It doesn’t have to take the place of this retirement portfolio that you’re building, and you don’t have to put an awful lot of money into it to get your feet wet, but it’ll be an exercise in learning how to do it, how to follow it, how to do the research. And you’ll start to understand if you have the appetite necessary to do the massive amount of research that it would take to maintain a portfolio like this.
Kathryn Tuggle: (28:54)
Interesting. What do you think about her word choice of “safe”?
Speaker 1: (28:58)
Oh, which, is there a safe allocation? I think that’s a really good point. Safe and the stock market are not words that necessarily go hand in hand. Neither is unsafe and the stock market. But when I think of safe, and I think of the way that most women describe safe, they equate that with, I don’t want to lose any money. That’s not what’s going to happen. When you buy a stock. That stock is going to go up, it’s gonna go down, it’s gonna go up, it’s going to go down. Hopefully if it’s a stock that you’ve chosen well, it will go up over time. If it’s a company that performs well, where you are making a bet on its future and you are in bed with its board of directors, excuse the phrase, it should perform well over time. But there is no guarantee that it will be worth more tomorrow than it was worth today and if that’s what you’re aiming for, I wouldn’t go in this direction.
Kathryn Tuggle: (30:01)
Great feedback. Our next question is also from an anonymous listener.
Jean Chatzky: (30:05)
Which is fine with us.
Kathryn Tuggle: (30:07)
We love it. She writes Hi Jean. I love, love, love, three loves, your podcast. I have a commute to work and have consistently been listening on my way home. I’m taking the time to contact you because I really need some guidance. I’m married with a 17-month old. I’m currently pregnant with baby number two. Congratulations.
Jean Chatzky: (30:25)
Kathryn Tuggle: (30:26)
I have a condo I bought in 2009 before I met my husband and we also bought a house after we got married in 2016. We make around $300,000 between us, max out our 401(k)s, and have more than 6-months worth of living expenses and savings. My issue is that I have about $50,000 in credit card debt and around $100,000 in student loans. My husband’s student loans total around $200,000. I’ve been seriously thinking of selling my condo to pay off the credit card debt, even though I know real estate is a wonderful investment and can be a source of income in the future, but with baby number two coming, I feel that it might be a good time to get credit card debt free. For the condo, I owe around $220,000 and could probably sell it for around $440,000. For our primary residence, our mortgage is $450,000. I would love your insight, feedback, and advice.
Jean Chatzky: (31:18)
I think it’s a great time, I always think it’s a great time, to get credit card debt. Free credit card debt is really, really expensive and the return that you get paying off credit card debt is greater than pretty much any other guaranteed return that you’re going to get on your money with the exception of a 401(k) match. So, I’m all in for doing that. My question before you sell that condo is what’s going on with that condo right now? Is it rented and are you making money on it and what’s the return on that money? Do you expect to be able to continue to rent it for the longterm? Do you like being a landlord? And the reason that I’m asking you to dig into all these questions is because I see some other ways that you may be able to get yourself out of some of this credit card and student loan debt. As far as the money that you’ve got sitting in savings, you didn’t say how much that is, but it sounds to me like it’s a considerable amount. I think that you may want to look at taking some of that money out of savings and putting it against that credit card debt. The pay off for doing that, ’cause you’re typically earning a fraction of a percentage point in savings and paying many, many times that on your credit cards, is usually really good. As far as the student loans are concerned, have you refinanced them? Are they at the lowest interest rates possible? Because if you haven’t, by refinancing them, you’re going to free up some additional cash that you can then use to throw against those student loans every month and the credit card debt every single month. And I would also say just take a look at where your money’s going on a daily basis and see if there’s anything that you can do to free up additional cash again, to pay down those debts. I’m not opposed to selling the condo. I think selling the condo might be a very easy and elegant solution. I just don’t want to see you getting rid of an asset that is producing a lot of value with you. So look at the return comparatively that you’re getting on your money from all of these sources. Compare it to the cost of carrying all these debts at their lowest rates, and go from there.
Kathryn Tuggle: (33:33)
Jean Chatzky: (33:33)
Thank you so much, Kathryn.
Jean Chatzky: (33:34)
Thank you. In today’s thrive, I hear the words “traditional retirement”, which generally involve some combination of waltzing out of the workforce at age 62 with a gold watch, a pension, and a party with various off-color plaques and jokes, so rarely these days. I think it’s pretty safe to say that no one is expecting to find anything like it when they’re working. Days are done and that’s if you expect your working days to ever be done in the traditional sense. Many of us are now negotiating with our employers for what’s called a phased retirement. One in which we pull back slowly from our working years and help ease the transition for the company and our fellow employees. While many employers don’t formerly offer a phased retirement track, per se, companies that have made such arrangements with employees have found it helpful with succession planning, with retention of talent and, not surprisingly, with the passing on of institutional knowledge. If it sounds like it might be something you’d like to try, the instruction is a simple one. Just ask your employer. Many managers are open to the possibility, particularly if you highlight the benefits for them. Some of the more persuasive talking points include things like, a reduced schedule means a reduced paycheck. They call it phasing out, consulting, or part time work. Whatever floats their boat, it makes no difference to you. Also, you can help mentor and train new people in your job or department because who knows the ropes better than you do? Lastly, I can’t think of managers I know at least who are particularly fond of surprises, so letting them know that you’ll be retiring in a year or two is far preferable to a month’s long notice. Thanks so much to all of you for joining me today on HerMoney. Thanks to Ed Buttowsky for the great conversation. I am definitely walking out of the studio feeling a little bit better about my retirement and the fact that it’ll be able to weather the storm. If you like what you hear, I hope you’ll subscribe to our show at Apple Podcasts. Leave us a review. We do like to hear what you think. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Track Tribe and our show comes to you through PRX. Join us next week. We’ve got a good one. Vicki Robin, author of Your Money or Your Life will be in the studio. Thanks so much for listening. We’ll talk soon.