Investing in Retirement: How Can Retirees Fight Back Against Low Interest Rates

Finances can be very complicated. Add investing to the picture and some of us would rather visit “La La Land.” How do we deal with this issue? Join us in conversation with finance expert Pam Krueger who has some great organization strategies to share. Enjoy the show!

Margaret Manning:

My guest today is Pam Krueger who is a financial and investing expert. Pam is an author and TV personality. She co-hosts at the PBS show MoneyTrack and has also created a great tool called WealthRamp which connects consumers with financial fiduciary advisors. Welcome, Pam.

Pam Krueger:

Thanks, Margaret. It is great to be here.

Margaret:

As you know, our community consists of lots of women over the age of 50. Many of them are already in retirement, others are planning it. Some have made investments in their lives, and some – with no fault of their own – are now struggling with pensions and social security.

Let’s talk a little bit about earning an income after retirement.

Pam:

We certainly will. Also, I’d like to talk a little bit about investing your savings to generate that income. Whether you are working, or you’re thinking about dialing back from work, or you are just passionate about your work and you wouldn’t want to quit until way into your 70s or 80s, you will need extra income.

The interest rates for the past several years have been punishing retirees. Certainly, we benefit in lots of ways from the lower interest rates, but then we are hurt by them when it comes time to retire.

Can you imagine, for instance, that someone who has saved a million dollars in savings, investments and 401K’s, will only get an income stream from those investments of about $35-$40 thousand a year when invested safely at today’s interest rates?

If you do the math, at some point you will have to start tapping your nest egg and syphoning money out from that. That’s why it’s so important to know what you’re earning on your investments.

Usually, when a couple goes to a financial advisor, the husband and the advisor will get talking about the performance of the stock market and how well the stock market has done, etc., while the wife would sort of sit aside, hardly understanding any of it.

The truth is, she is interested in one thing only: that the money lasts the rest of their lives. I like to say that women are worriers, while men are warriors, get the two together in retirement because you really have the same goals. You want your money to last the rest of your lives.

So, I always suggest that before you start investing, you should get organized first. To get organized means that you take a bucket strategy, where you have one bucket of cash that you know you are going to need now or in a couple of years.

The money in the that bucket cannot be invested, because investing, by definition, means you are willing to keep it and stay with it over a long period of time. This first bucket consists of savings – bank accounts and cd’s on which you get dismally low returns of one percent.

If you are fortunate enough to have a second bucket, that would be your investments. You need those investments because how much longer are you going to live? You are 60 now.

Margaret:

Yes, life expectancy is increasing, so 30 more years at least.

Pam:

Exactly. For at least 20 of those years you would want to have some money that is going to work for you at a higher rate than you are going to get in bucket number one. That means you have to take a little bit more risks to get that higher rate.

Psychologically though, you can accept that risk because you have your bucket one, and bucket two will pour money into bucket one over time. But if you kept all of your savings at these low rates, you’d be taking a risk of not having enough money and not letting your money lasts.

So, it’s not that you want to invest – you have to invest. You don’t get up in the morning and say, “I can’t wait to look at the investments I could be making today.”

In the second bucket you can consider things like bonds that probably don’t have a maturity date beyond two or three years. Also, here go certificates of deposit at the bank where you can go out a little bit longer to get the higher yield – but only with some of it, to stagger it. This is called building a ladder of cd’s.

The third thing you can do is get dividend paying stocks. Believe it or not, you still need money invested in the stock market when you are 70. If we have bucket number one filled, bucket number two has to be invested. Once you organize it that way, it is a lot easier to tackle.

Margaret:

I think that is really good advice. Are there ways to invest in the bank, like cd’s or something else, where you can withdraw the invested money in a case of emergency?

Pam:

No. Most certificates of the bank don’t work that way. They punish you if you take your money out earlier. So, don’t go into it with a long commitment. Let’s look at bucket number one, because that’s bucket-number-one money.

Bucket number one includes the money you will need for up to two years. You know what you need to spend over 18 months. For instance, you may have grandkids and you want to help them pay for tuition, or you’ve got expenses along with social security. This is all money you keep in your bucket one.

You’ve got to keep your savings really liquid so that you can use it when you need it. In that bucket you want to be careful not to go out beyond two years in a cd. If you decide to go out on it for more than two years, don’t do it with all your money. Keep a piece of your savings and put it in a savings cd for six months.

Margaret:

That way you can get a little bit more interest than you do on your regular savings.

Pam:

Exactly. Then take another little chunk and go out a year. Take another little chunk and go out two years. By the time that first one has come due, you have already got money there. This way you are setting yourself up for success without getting dinged in penalties that just take away from your money.

Margaret:

I know there are a lot of women whose bucket number one is very small, however. Some of them have given up hope a little bit, too. I know you said that some people may continue to work after retirement, but what if you don’t work and you have a small bucket of savings?

Would you encourage people to stay in a job they don’t like? Because, after all, you have got to have that bucket now that you are living longer and to replenish it.

Pam:

This is always the biggest struggle that we have – trying to figure out what to do. Sometimes, even though you don’t relish going to the office, you are getting a paycheck and it gives you a sense of security.

I think that you need to continue working until you at least have the critical amount of a year’s worth of after tax savings sitting in that bucket. And you don’t want to take that money and invest it. This is money that you are going to need.

Then you want to supplement that with what your social security or your pension expectations are going to be. When you look at all of your income sources, that’s the pivotal moment when you get to decide whether you will continue working to build on that savings bucket.

Maybe you can change your job if you don’t like your current one, or pursue a new one if you were laid off. Just get doing what you’re doing until you at least fill that bucket with a year’s worth of savings.

Margaret:

I like that your advice is so practical and straight forward. It makes perfect sense. So, if you are going to give up a job because you are emotionally tired or you just don’t want to do it anymore, or you get laid off and you don’t want to look for another job, then at least be aware of the consequences.

Making that decision will leave you with nothing in the bucket, and you are going to have to cut back on your expenses.

Pam:

We all know people who are living on too small a bucket. We also know that social security is not going to be enough to cover a mortgage payment. So, at some point of our lives we all have got to be honest with ourselves and get a reality check on our finances.

When you turn 60, you already need to know how you’re doing financially. Be truthful with yourself and don’t wait until it’s too late to do something about it. You don’t want to live in denial because by the time you turn 70, health issues may come into play.

You do much better psychologically and financially when you know where you stand, because then you have time to adjust. If you need to move to a one-bedroom condo instead of the three-bedroom house you have been living in, do it.

You want to fill bucket number one. You can’t have bucket two, which is the savings to invest for income, until you know that your bucket number one is filled.

Margaret:

It’s never too late. It really isn’t. I know people feel very frightened in their 50s when they lose a job, and it’s happening all around corporate America and worldwide, but they can actually do consultancy work to keep that first bucket full.

Then, as you said, downsize or reduce costs so that you can get a little bit into bucket two with all of its wonderful investment options like cd’s and bonds.

Pam:

Yes, and then keep going into things that will provide you income in the long run. That’s what investing is, really. So, the one thing you should avoid at all costs is deluding yourself. If you know you can’t sustain your family home, or you don’t need a big house anymore, then downsize and live within your means.

I have a quick story to tell.

Margaret:

Yes of course, go for it.

Pam:

If you have an iPhone, you hear Siri’s voice all day long. Siri, by the way, is the voice of a real woman. Her name is Susan Bennett and she lives in Atlanta, Georgia. Also, she’s on my show. You would assume that with her voice being all over the world, Susan is well retired, or would be if she’s of retirement age.

Well, she is well into retirement at age 68, but she still works. Financially, she has to work. She and her husband have a band. They make music and get paid for it. They live in a sweet little modest home. They are not wealthy, but how did that happen?

Fifteen years ago she got a call from a tech company who hired her to do voice overs. They paid her day rate, and she signed off on it. About a year later, a friend of hers called and said, “Susan, I think your voice is the voice of the Apple devices.”

She went into a bit of a depression because she realized she never got paid. Can you imagine how you would feel if you should have been retired with millions? My point to the story is, Susan has figured out life is pretty damn good – because she can still work.

Margaret:

Yeah. She is alive on the planet, she has got someone that loves her and she has got something that she loves to do.

Pam:

That’s exactly right. Sometimes that gift is bigger than the 10 million dollars, because she gets up in the morning and says, “I can go to work and I love what I am doing.” She is 68, she can’t stop working and she doesn’t want to.

Margaret:

I love that story. Thank you for sharing it. Before we close, I’d like to mention that you can find Pam at her website. You can also reach her via WealthRamp, which is her tool for matching fiduciary advisors with consumers.

Thank you so much, Pam.

Pam:

Thank you.

Margaret:

Take good care.

Have you thought about organizing your finances into separate buckets? Have you done a truthful evaluation of your finances? If you have to choose between continuing to work and living on a modest budget, which would go choose? Please join the conversation!