Suze Orman: Why Retirement Savings Makes No Sense If You’re Living Paycheck to Paycheck — And What To Do Instead
Written by
Gabrielle Olya
Edited by
Gary Dudak
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If you’re in a place where you’re not making much money but still want to work toward financial goals like putting together a retirement plan, it’s difficult to know where to stop spending and start saving. Should you prioritize paying off debt? Save for the short term or the long haul?
Suze Orman, financial advisor, money expert and co-founder of emergency savings startup SecureSave, shared her best advice for prioritizing your financial goals — including why funding a traditional retirement account should not be at the top of your list if you are one of the many people living paycheck to paycheck.
Orman says, “The most important thing, really, for everybody to understand about their money … is that you have got to live a life below your means, but within your needs.”
This is why she believes that funding a traditional retirement savings plan doesn’t make sense until you get your household income in order. This is not to say that setting up a 401(k) or individual retirement account (IRA) isn’t important, but here are some other things you should consider doing first.
Start by Creating an Emergency Savings Fund
No matter your financial situation, Orman says your first goal should be to build up an emergency fund.
Even if you have credit card debt, this should be your top priority so that you don’t have to take on more credit card debt if an emergency expense arises. You can’t start working on your future retirement income until your present circumstances and expenses are covered.
Contribute to a 401(k) Up to the Employer Match
If you have an employer-sponsored retirement savings account and a match is offered, contribute enough from each paycheck to get the employer’s match. If a match isn’t available, pay off credit card debt instead to help lower your bills and cost of living in the long run.
Pay Off Credit Card Debt
“With inflation having driven up the Fed rates, [this] has had a direct result on the interest rate that the credit cards are charging you on the credit card debt, so you’ve got to get rid of that,” Orman has said.
In other words, it’s easier to increase your savings rates when you’re not paying off high interest rates.
Finally, Save for Retirement
Once you have an emergency fund and your credit card debt is paid off, you can contribute more than your employer’s match to your retirement savings. These will come in handy as Social Security benefits aren’t as predictable as they used to be once you hit retirement age.
“You want to designate as much as you possibly can to a retirement account, but if and only if you’re totally out of credit card debt,” Orman said.
However, if you are not a high-income earner, you may be better off putting any leftover funds into a Roth account instead of a traditional retirement account.
“If you’re living paycheck to paycheck or you’re not in a very high-income tax bracket, it makes absolutely no sense to do a traditional retirement account where you’re getting a tax write-off — you don’t even need a tax write-off,” Orman said. “What you need is accessibility to funds without a penalty.”
Gabrielle Olya contributed to the reporting for this article.
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