Suze Orman answers your questions

With inflation on the rise, what should I do about my 403(b) plan? How much should I contribute monthly? Should I increase/decrease contributions based on the economy?

I understand your concern. Rising prices for just about everything, the growing threat of a recession hitting us in the next year, and the steep drop in stock values is not exactly calming.

It’s totally natural to think you need to “do something” given what is going on in the economy.  But the truth is, doing nothing is likely your smartest move.  Making changes to your long-term saving and investing strategy based on current events is never a wise move. The key is to stick with a plan that is built for long-term success.

Whether you are saving for retirement in a 403(b) plan, a 401(k) or an Individual Retirement Account(IRA), here’s what you want to focus on:

Stocks are the best way to cope with inflation

Given that inflation is suddenly very much back on our radar, I want to take a moment to explain the concept of “real” returns.

A “real” return is financial lingo for the actual gain or loss of an investment after accounting for inflation. For example, an investment that gains 10% when inflation is at 3%, has a real return of 7%. An investment that gains 2% when inflation is at 3%, has a real return of -1%; it is losing ground to inflation. Real returns are sometimes referred to as inflation-adjusted returns.

Over decades, stocks have delivered the best real returns. Better than bonds. Better than cash. Bonds and cash are important for providing stability and safety. But both bonds and stocks aren’t built to earn more than the inflation rate. That’s the job of stocks in your retirement account.

And yet right now it can feel so uncomfortable to stick with stocks, as we are in the midst of a bear market.

If you’re stressed I totally get it. It’s not easy watching investments lose value. But I want you to take a deep breath and give yourself some long-term perspective.

A bear market is when stocks fall at least 20%. This current bear market is the eighth bear in the past 50 years. And during that stretch—including the losses of the bear markets—the S&P 500 stock had an annualized gain of 10.7%, and the real return was 6.5%. I hope that helps you realize that patience is a very valuable investment strategy.

The firm that manages your retirement account likely has a free portfolio allocation tool that can help you figure out the right amount of stocks to own based on your age, and other sources of retirement income (A pension, Social Security).

Consistent investing is the key to success

If you have a workplace retirement plan, you are set up for success, because you have contributions automatically taken out of each paycheck. For those of you saving on your own in an IRA, you can set up the same automated saving plan for free. The firm that runs your IRA will have an easy online system to authorize having money sent from a bank account into your IRA; you choose how frequently and how much. Try to aim for monthly.

Save at least 10% of your salary 

Again, how much to save with each paycheck should not be based on what is going on in the economy. The focus is on consistently saving, and saving enough to give yourself the best shot at landing in retirement with the money you need to live the life you want. As a general rule, I want you to aim to save at least 10% of your salary. If you waited until your mid 30s (or later) to get serious about saving for retirement, make your goal 15%.

Not there yet? That’s okay. Just push yourself to increase your savings rate. How about 1 percentage point every six months, until you reach your goal? And don’t wait for the bear market to end. Right now is a fantastic time to increase your contribution rate, as you will be buying stocks when they are on sale.

My 8-month emergency fund is losing value due to inflation. Should I ramp up my savings to counter inflation?

You refer to your eight month emergency fund. My question for you is what is the eight months based on? Your living costs from two years ago, or your living costs today? If your essential living costs have increased, then you should consider increasing your emergency savings.

Take a careful spin through your expenses—rent, utilities, groceries, transportation etc.—and I think you will realize your monthly living costs have increased. If that’s the case, then it’s a smart move to increase your emergency savings as well.

I applaud you for having an eight-month emergency fund. That is fantastic. I would be even happier if you made it a goal to build it up to cover 12 months of living costs. I don’t expect you to hit that overnight. I realize it will take time, but it’s a smart goal to give you plenty of security that you can withstand whatever comes your way.

What should I do with an extra $500 per month? I have no debts to pay off, just a mortgage

Here are my favorite moves to build financial freedom.

• Build an emergency fund that can cover one year of living expenses. Yep, one year. That is a whole lot of peace of mind.
• Save at least 10% of your salary for retirement. If you have a Roth 401(k) option, I would use that. If you don’t have a Roth option in your workplace plan, you should still contribute if there is a matching employer contribution. But I would only contribute enough to earn the maximum match. For additional retirement saving (and for anyone without a workplace plan) I recommend contributing to a Roth IRA.
• Aim to pay cash for your next car. The average car loan payment is more than $500 a month. That is nuts. And I expect that to climb now that interest rates are rising throughout the economy.  I hope you drive your current car as long as possible—it’s the financially smart move—but when it’s time to retire that car, being able to pay cash, or at least reduce what you need to borrow will be a smart win.
• Look into long-term care insurance. Anyone at least 50 years old should explore whether long-term care insurance makes sense. Medicare does not cover long-term care needs. That’s on you…and your family. Long-term care insurance can be used to cover care giving in your home. The premium cost can be a few thousand dollars a year. Given that future care costs can be thousands of dollars a month, I think LTC insurance can be so smart.
• Pay down your mortgage. This only makes sense if you are nearing retirement and can afford to stay in your home. Remember, even if you get the mortgage paid off, you still have property tax, insurance and maintenance costs. Please be clear-eyed on whether you can comfortably afford to stay in your current home. If you are sure it makes sense to stay put—and you are on track with your retirement savings and emergency fund—then work on paying down the principal on your mortgage ahead of schedule. You will save thousands of dollars in interest. And most importantly, you will land in retirement debt-free, which is a huge stress reliever.

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Suze Orman is the author of 10 consecutive New York Times bestsellers, a two-time Emmy award winner, and your go-to for honest answers on everything finance. She is the most recognized personal finance expert in America today and host of the Women & Money (and Everyone Smart Enough to Listen) podcast. Suze is excited to be a contributor for Money Mentor.

Suze and Alliant teamed up to help Alliant members make the most of their life by teaching them to make the most of their money. New Alliant members are also eligible for The Ultimate Opportunity Savings Account.