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Suze Orman on the financial basics, FICO

Financial guru Suze Orman.

Tess Vigeland: Alright, so there's some advice to follow as you move slowly through the humid haze this weekend. Nothing terribly complex. But what if we were giving you advice you just really didn't want to hear.

Suze Orman: Here is what I want you to do. I want you to sell the house.

Woman gasps

Orman: Ah! Forget about it. You listen to me. You can't afford the house, the house is too much. You're in San Francisco, I want you to sell the house.

You listen to me! Or listen to her. That's Suze Orman, of course, taking one of her viewers to task for retiring way too early. We brought you the first part of our conversation with Orman a few weeks ago. Today a little more from behind the scenes. She says the begging for permission to do dumb things with money doesn't stop when the cameras stop rolling.

Suze Orman: A lot of 'em will say, "No, no, no. You didn't have this right. No, I can do this, let's do this again." But here's the thing, if you have credit card debt, if you don't have an eight-month emergency fund, if you're not funding your retirement account to the max, if you're not doing what you should be doing, then I am not going to allow you -- at least on my watch -- to buy something that is a want, not a need.

Vigeland: Well, you will often say to people, "Hey, look at what you just said to me. There's your answer." I wonder how much of what you tell your audience do you think they actually kind of already know, but they just want to have it affirmed by you?

Orman: I think that some of them, obviously, have a feeling. But a lot of them, honest to God, they do not. Just the other day I did a thing of somebody who wanted to know if she could afford to retire. She was 60 years of age and saved $782,000 and that's everything she had. And I told her no. She, right now, has written two or three long e-mails saying I am wrong, she absolutely can afford to retire. She cannot believe it, she's totally embarrassed. But she thinks, 'cause she has $800,000 she can afford it. At the age of 60, she can't start Social Security yet. $700,000, $800,000 today, in a retirement account will only generate for you -- if you are lucky -- about $30,000 a year of income before taxes. After taxes, you're looking at $20,000 a year. Who can live on $1,800 a month?

Vigeland: But, boy, you look at those numbers and you think about some of the average 401(k) balances that are out there. I mean, you know, there's studies that the vast majority of people who are in their 50s and 60s don't have more than $100,000 stashed away.

Orman: That's right and that's why they're going to have to work for a long, long time. So it's not only how much money you have, but how much is the interest rate you can get on that money going to generate an income for you. It's what will the tax brackets be, it's what are your expenses. All of that has to be taken into consideration.

Vigeland: You know, I've seen criticisms for being too basic, that the things you advise people on are just so common sense. Why do you think so many of Americans need those basics?

Orman: We have to get so basic, because you can't put together sentences unless you know the alphabet. When it comes to money, they don't know what a Roth IRA really is, they don't know the difference between a bond and a bond fund, they don't understand APR on their credit cards, and what is a FICO score and why do these things matter.

Vigeland: And I guess, again, this is a problem with both education and a lack of talking within the family about money.

Orman: Yes, and you know, we don't talk about it. We'll talk about sex, we'll talk about all these things before we'll talk about how much credit card debt we have.

Vigeland: You have a long standing relationship with Fair Isaac.

Orman: Yes.

Vigeland: I am fond of asking who died and made FICO king. Do you think their rules are fair?

Orman: No. I think the truth of the matter is, if it were up to me, all FICO scores would be absolutely free. I also believe that the FICO scores that the way that they happen to be calculated are not a good indicator what people will or will not do with their money. I think it's an absolute travesty that Experian, which is one of the credit bureaus, will not allow you to buy your FICO-Experian score anymore. The only thing they will sell an individual is this Vantage score and only maybe 10 percent of the creditors use them. And I also think it's absolutely nuts that we have three credit bureaus. I think we should form a whole new one and get rid of all the other three, but that is beside the point. But I think the people need information about themselves, and I think that all of that should be given free to everybody.

Vigeland: Suze Orman, thank you so much for being with us today.

Orman: Thanks for having me Tess.

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Suze Orman: Glad everybody is jumping on your statement about not being able to live on $1800/month. I live in a rural area of northern Missouri and I bet 25% of the population here does just that...you may be just ill-informed, but your statement comes off as painfully snobbish. Nora Othic

Glad to see so many comments on not being able to live on $1,800 in retirement. Might be time for Suze to take a walk on the lower middle class side of investment. Define want and living without better to cut your expenses down to expected retirement funds five years prior to retirement to see if you are ready for retirement. You would be surprised how much you can save.

I nearly drove off the road when I heard Ms. Ormon say "Who can live on $1,800 a month?" Obviously she has no clue as to just how many people in the US have to live on that or less! I earned my PhD two years ago. Like much in this economy, the bottom has dropped out of the higher education market and full-time, tenure-track jobs are scarcer than usual for academia. Therefore, I teach as an adjunct at two different universities, commuting 90 minutes to one of them, just to cobble together a salary that will pay my bills. Yes, I live on about $1800 a month, less if I don't manage to get any summer courses to teach. The really scary thing is that I'm getting paid pretty well for an adjunct. I have many colleagues in different areas who get much less. So perhaps, as Ms. Brown suggested above, Ms. Ormon ought to get out more before making such sweeping statements.

$1800 a month? Suze's being pretty hasty here. What on earth is wrong with an annuity? With $792K to invest, she should be able to receive almost $4100 a month, before taxes (and we don't even know whether her $792K is tax-paid or not). But with a non-wage annuity income of about $49K per year, she's paying less than 9K in federal taxes. Suze really should tell us if it is her professional opinion that an annuity is an unsound retirement tool.

Ms. Orman stated that the 60 year old woman with assets of $800,000 can not retire - she must continue to work. Please ask Ms. Orman where anyone over 60 can realistically find a decent paying job (>$50,000 per year.) Step into the real world of 2011, Suze!!!

I love Suzie Orman. I also make my own decisions, and I know Suzie would disagree with me on many of them.

My one quibble is I wish Suzie would spend a little less time cheerleading, and more time on education. I don't need an affirmation to tell me "You're good enough, and your smart enough and doggonnit, people like you." I could use more information on how to make a short sale purchase go through in less than 90 days, without the deal blowing up.

I'm planning to retire at 60 on a few hundred thousand less than $700,000. And my mutual fund adviser (TIAA-CREF), says that it's possible. I think your story was off-base and panic inducing. Many of us don't have the luxury of accumulating $800,000+ for retirement but we do the best we can. I've spent my career in non-profits organizations generally earning less than $55,000 annually and am quite proud of my retirement fund. I do live on $1900/month in order to contribute the max to my retirement.

Marketplace is not very fond of investing in real estate. During the real estate boom experts said th fair price for a house was 15-16 times the equivalent of what it would rent for. This translates into a 5,5% rent. In the case of a 780K condo or home, the rent would be $4,300. Property taxes and condo fees are 2% typically, so you net 3.5%. You only pay taxes on 1% of the 5.5% rent after taking out depreciation taxes, condo fees and all other expenses. Mortgage interest is also deductible, so if you have a mortgage you probably won't owe any taxes. A great book to get started is the Wall St Journal guide to Real Esate investing.

"Who can live on $1,800 a month?" asks Suze Orman. Well, Suze, I live on $1765/mo, plus approx $50/mo from some charitable annuities. It can be done. You talked about a woman who'd saved $800K and how she couldn't retire on that. When I was laid off at age 60 I had very little set aside for retirement. At $8/hr before taxes, just about all my money went to pay for the trailer I bought to live in and rent for the lot where it was located, not to mention the insurance I was required to buy and all the other expenses of living on my own. Even at that, it cost less than renting an apartment in Austin, Texas. These days I honestly don't think Suze Orman has a good grasp of what it's like to be old--I'm now 67--and fully dependent on Social Security for income. It takes some REAL SKILL to make it on these terms. I now live in the Portland, Oregon area in a trailer I bought for $10K and pay $415/mo for lot rent. This is about $300/mo less than apartment rent in this area. I paid cash for the trailer so don't have a mortgage. And I am better off than some of my neighbors here in the trailer park. An $800,000 nest egg? Only a spendthrift couldn't retire on that. My advice to Suze: walk in my shoes with no safety net other than Social Security and make that your life committment, then make some remark about "Who can live on $1800 a month." There are lots of us out here doing that very thing, Suze. Maybe you could come slumming in our neighborhood sometime to see how we do it. Thank you very much.

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