For over two decades, Suze Orman has been trying to help everyday Americans with their finances. Whether it's been through her The Suze Orman Show on CNBC or the 10 books she's published, her goal is to put regular folks in a position of financial strength.
So it was with regret that I read what she recently said about retirement in a segment with NBC's The Today Show.
Giving broad financial advice can be a very tricky business. You want to encourage people to put themselves in the best possible position financially. Often, we might believe that fudging a few facts here or there isn't a big deal if the end result is good.
Two years ago, I called out Dave Ramsey for telling investors to expect returns of 12% per year. In an interview on his radio show, he insinuated that the 12% claim was beneficial because it motivated people to save and invest.
Except for the fact that when this 12% assumption is used to justify taking out way too much money from your nest egg every year, the results can be disastrous -- as in, a 50% chance of running out of money in retirement. I still haven't heard back from Ramsey on this part of his plan.
That experience led me to this conclusion: The best we can do in the financial community is lay out all of the cold, hard facts for people, so that they can make the best decisions possible. When we start trying to manipulate through falsehoods, unexpectedly bad things can happen.
Where Suze Orman is so wrong
On average, the vast -- vast -- majority of folks in retirement don't spend more money than they did pre-retirement. The fact that Orman thinks this is the case should give us pause and make us wonder where she's getting her information. While it's true that medical costs do rise in retirement, they are more than offset by reductions in spending on just about every other category.
There are several reputable studies that can debunk her claim, but perhaps the best comes from Morningstar. In a 2013 working paper that uses government survey data, David Blanchett, Morningstar's head of retirement research, thoroughly debunks Orman's claim:
There is a growing body of literature exploring the spending habits and tendencies of retiree households. The majority of the studies note that consumption tends to decline at retirement... Overall...the real change in annual spending through retirement is clearly negative.
In essence, the research found that consumption falls in retirement before spiking somewhat in older age -- usually for medical costs. In addition, higher earners tend to experience greater reductions in spending.
For those who are years -- even decades -- away from retirement, understanding this trend is crucial: it helps you get a ballpark figure for what you'll need in retirement.
How this affects retirement planning
If we are to assume, as Orman argues, that we'll be spending more in retirement, we will need a much bigger nest egg. Let's take a hypothetical case. A husband and wife earn $50,000 per year and spend $40,000 total (including taxes). Using the 4% rule as a guideline, and assuming Orman's claim that spending will rise to $50,000 per year in retirement (after the average Social Security retirement benefit) the nest egg needed will be $869,300.
But we already know that Orman's claim is false for the majority of Americans. In fact, most financial planners say that we should prepare to replace 70% to 80% of our expenses. But after reviewing the data, Morningstar thought even that estimate was overestimating the need:
While a replacement rate between 70% and 80% may be a reasonable starting place for many households, when we modeled actual spending patterns over a couple's life expectancy...the data shows that many retirees may need approximately 20% less in savings than the common assumptions would indicate.
So let's get this straight. The traditional plan says that we need to replace 75% of our expenses in retirement. That would mean the same couple would need a nest egg of $369,300. But even that, according to Morningstar, is overstating it. When all is said and done, the couple would really need a nest egg of $295,440.
The absolute numbers are interesting, but it's the relative difference between these two figures that is really striking. If we assume Orman's non-fact-based claim, we will think that our nest egg will need to be almost three times the size of what Morningstar's exhaustive research found.
Sure, you could argue that listening to Orman might cause one to oversave, which isn't such a bad thing. The problem is, it's impossible to know what the second-order results of assuming this information could be: like sleepless nights worrying about finances and its incumbent medical problems, or giving up on saving for retirement entirely as it may seem like an impossible goal.
Our job as financial writers shouldn't be to deceive in order to control behaviors. It is to lay the facts out in the most digestible form possible, and hope that it leads to smart decisions.