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HerMoney with Jean Chatzky
Your Money Map Replay: The 2025 Economy and Your Retirement with Betsey Stevenson
00:31:47
What a new administration could mean for retirees.
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- [00:00]
Betsy Stevenson
So what you want to be thinking about with your annuity or your reverse mortgages is I want to pay to ensure that I have income if I live past a certain amount of time. You don't need an annuity for most people to be thinking about in your 60s or even your early 70s. Your annuities are going to be your insurance against your winning, you know, the lifetime lottery and living, you know, to be a hundred.
- [00:31]
Ryan Reynolds
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- [00:52]
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- [01:32]
Jean Chatzky
Hi everyone, this is Jean Chatzky, host of the her money podcast. It's 2025 and we officially have a new administration at the helm in Washington. How will its economic policies impact your wallet and more specifically, your retirement? Before we turn the calendar to 2025, I got together with Betsy Stevenson, a University of Michigan public policy economics professor and former chief economist at the US Department of Labor, to ask that question. She recently joined me on your Money Map, a show I host that is sponsored by the alliance for Lifetime Income. From inflation trends to the impact of tariffs, we covered a lot of ground, and Betsy shared her top tips on how to prepare for changes that could be coming down the pike, especially with the administration we now have in place. It's an episode packed with important information you won't want to miss. So keep listening and be sure to check out the rest of the amazing work being done by our friends at the alliance for lifetime income@protectedincome.org Betsy, thank.
- [02:41]
N/A
You so much for joining me today. Welcome to the program.
- [02:45]
Betsy Stevenson
It's great to talk to you.
- [02:48]
Jean Chatzky
So it is 2025 as I said.
- [02:52]
N/A
What are your predictions for the economy in the coming year?
- [02:58]
Betsy Stevenson
Well, we have had really just a miraculously strong economy for the last two years. Growth has exceeded the projections. So we've just seen people, more people are participating in the labor force. We've had businesses start at a really high, unusually high rate. That honestly, has left a lot of people perplexed. What propelled so many new people to start businesses and hire people? One of the things we know is what kept the momentum going in 2024 was that we had a lot of immigration. Not, you know, you hear a lot about undocumented at the southern border, but it's really the whole pool of immigrants that are coming through, documented and undocumented. We had had such a decline in the immigration during the pandemic that, you know, there was one point where, you know, I think that was a big concern that that would really slow the U.S. economy down, that people flooded back into the U.S. so when we look at 2025, what I see is a very strong economy, but one which has been really operating at its peak. And so no matter who had come into office in January, my concern is when you're operating at your peak, you're doing the best you possibly can do. There's kind of only one direction to go, and that's we could stay the same or we could go down. And I think that it'll be interesting to see how the incoming administration reacts, because this is very different from when President Trump came in and took the oath of office in 2017. We were on an economy that had a very strong upward trajectory. And we can now look at that data in hindsight, and we can see that that sort of upward trajectory started around 2015. So we had this pivot. The economy started growing much stronger. Labor force participation started growing much stronger 2015, 2016, and that momentum continued all the way through the start of the pandemic. And that's a very different economy to be coming into, one that's on the upswing with still actually a lot of room to hit what people think of as potential. Right now, we're really at a place that is as good as it can get. So why don't I stop there and then we can sort of talk about what those risks are and what that might mean for different people.
- [05:32]
N/A
Yeah, it's interesting because it's as good as it can get. The data that came out around the election showed that a lot of people don't necessarily feel that it's as good as it can get. And one big Reason for that has been inflation, which although the inflation rate has come down, prices themselves have not. We haven't had deflation, right? Prices have not gone back, except maybe in the case of gas, to, to where they were. So let's take apart some of these individual factors. Let's talk about inflation and interest rates and unemployment and where we see those things falling, right?
- [06:18]
Betsy Stevenson
So inflation's very tricky because it's really hard to have deflation. In fact, you pretty much most Americans wouldn't want deflation because what deflation would be would be basically people getting pay cuts on average because inflation is a generalized increase in the price level which includes the wages and the incomes, right? Everything we spend is somebody's income. And so when prices are coming down, that means somebody's incomes are going to have to go down. One of the things that made inflation so painful was it happened so rapidly. We had, you know, inflation peaked at 9%. In other words, prices jumped up 9% in a one year period. And that's a lot, we're not used to that. And a lot of people would like to see the prices go back down, but bringing them back down is really, really tricky. And so what economists tend to focus on is just stabilizing at this new price level where we're earning what we earn and we're not having prices go up any, any higher. And what we have seen is for most Americans adjusting their wages for inflation or their, their portfolio for retirees or their house prices. People are better off, even in inflation adjusted terms than they were prior to the pandemic. I think one of the things that feels really bad for people is you're like, finally I got a break and you know, my portfolio went up, my house price went up, my income went up, but now, darn it, the prices went up. So I can't really buy it much more than I could before. And that's frustrating because you'd really like only one end of that to have happened. Unfortunately, these things are somewhat, you know, very intricately tied and you don't get to divorce them in quite the way I think people would really like to. So I think it's, it's very hard to get used to this idea that we had inflation that was something we're not, we're not used to. And when you think about it, prices go up a little bit every year and we sort of don't pay that much attention. You know, I had this experience this weekend. I went and bought a dozen bagels from Bruger's Bagels And I was like, what, $19?
- [08:33]
N/A
I know.
- [08:34]
Betsy Stevenson
It was just like 12 or.
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Jean Chatzky
I know.
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N/A
When did it start costing $2 a bagel?
- [08:40]
Jean Chatzky
No, I've had the same bagel.
- [08:43]
N/A
Same exact bagel experience.
- [08:44]
Betsy Stevenson
And then when I thought about it, I realized part of the problem is that I'm old enough to remember when it was like $12 and you got a baker's dozen. And what happened was every year it crept up $0.15, $0.25, $0.40. And I just didn't really pay that much attention. So it, you know, creeps its way up to 15, and I'm not paying that much attention. But then it jumps up $3, and I'm like, wait, now you've got my attention. But there's also part of my brain that's remembering where it was 15 years ago instead of remembering where it was five years ago. So I'm not. It's very mathematically hard for me to say, oh, if we just had normal inflation, it would be $17.50 instead of, you know, 19. And I think that's just very hard for. For people to do that kind of math. You know, I have in. In my Principles of Economics textbook, I have an entire section on why you really don't want inflation to be zero. Inflation at zero is very, very tough. It's tough because it means that anytime a business slows down, they really need to lay people off rather than just saying, you know what, we're gonna. We're gonna hold off on raises this year, which is effectively a pay cut. But we know that people do a lot better not getting a nominal raise than being told, we're going to cut your pay. And so what we see is when inflation's very, very low, lots of things get clunky in the economy, and businesses are slower to create jobs and faster to cut jobs. There's been studies of this all over the world. You kind of want inflation around 2% a year. It just makes everything work better. That's why the Fed aims for an inflation of 2%, not zero. There's also actually some evidence that 2% inflation is sort of overstating things, because we forget when we get new goods, like we got a smartphone and it had a camera and it has the Internet, and it replaces a whole bunch of things. We don't actually put that into inflation and then say everything got cheaper because we got smartphones. So we tend to under adjust for quality in lots of different ways. Right. We under adjust for improvements in medical care. We just look at the prices. We don't look at the price for outcome. So that's another reason we like to have a little bit of inflation. So we don't want it to go to zero. We definitely don't want it to go negative, but we would like it to be around 2%. It's not at 2% yet. It is, you know, it's a little bit higher than that. It's sort of bouncing between 2 and 3. The reason I point this out is, you know, it's the Fed is going to have to make some pretty serious decisions about where to keep interest rates. We've got a slowing economy and we have inflation that is still running a tiny bit hotter than what they'd like. How are they going to balance those trade offs? Are they going to cut interest rates more to try to make sure that the economy stays robust? And there's a reason we want an independent central bank because we don't want a president who is trying to cause inflation in order to keep rates low. Today. That is a real temptation. So actually how we ended up with the messy, messy inflation situation we had in the 70s was that there was pressure on the Fed to lower rates before inflation had been beat. And that political pressure, the Fed caved into it. And then we saw this whole period of stagflation result from that. So I think hopefully everybody will keep that in mind. As Trump's trying to put some pressure on the Fed that the Fed should make these decisions independently, we have another challenge which, you know, there's always a little bit of a gap between what President Trump says he's going to do and what he does. Because what he says he's going to do isn't necessarily going to have the outcomes he wants. And I do think at the end of the day, he looks at what the outcomes are and he'll reverse course or change course to get the outcomes. He's coming in as president at a time when the economy is sort of operating at potential. So it's going to be hard to get the economy to be any stronger. He's already done the Tax Cut and Jobs Act. His problem now is that parts of it are expiring. So what he's going to be trying to do is fight for the thing he had in the past. Rather than doing some new tax cut to try to stimulate corporate businesses, he's going to be trying to prevent a tax increase that is going to happen automatically by law, unless he succeeds in preventing that.
- [13:54]
N/A
So I want to get specific about it, about the retirees that we talk to on this show, this show focuses a lot on what the alliance for Lifetime Income has called the Peak 65 generation, Peak 65 zone. This is a time when we've got 4.1 million Americans turning 65 every year through 2027. Research from the ALI shows that nearly half of them don't think that their retirement savings and their sources of income will last their lifetime. A third of them are worried about monthly expenses. And so all of this talk about tariffs, right, and raising prices is particularly scary. Yes, Social Security has a cost of living adjustment, but Social Security is not the sort of be all and end all for this entire generation. When you look at people who are either in retirement or heading to retirement, what are you concerned about for them and what sort of moves do you think they should be making?
- [15:07]
Betsy Stevenson
I think that there is just such a wide range of people, financial circumstances and that that age, obviously the concern is, do you have enough set aside in savings and are you ready to retire? When we look at what's happened for the price of houses, we often hear that the big rise in housing costs as a story that is bad for Americans. But the reality is a large fraction of Americans own their own home. And this is great for a lot of middle class retirees. Most of their assets are in their home. And I think a lot of them are going to have to figure out how they tap into that. You know, looking at products, I think we're going to have to be looking at much more financial innovation products to help people take advantage of that. Whether it's reverse mortgages or whether it is being able to sell your mortgage along with your house so that you can get into that retirement community you want to get into. But you can take advantage of the fact that you locked in at a 3% mortgage rate and you want to be able to sell your house to someone who is going to pay to not just get your house, but to get your 3% mortgage. That product does exist. I think a lot of people aren't aware of it. So I think it's trying to figure out how to get the most out of your house because that's going to be pretty much the biggest asset a lot of these people have. And you know, for again, all the sadness of the inflation over the last four years, for a lot of older Americans, that inflation ended up being a net good because they were homeowners, not renters. And so even though in the data it shows that they are paying more in implied rent to live in their house, what they really have also is their House is worth more, and that's going to be really useful for them as they retire. And we've also seen the stock market really go up and it's strong economy and the fact that nominal prices are higher, so the stock market keeps up with inflation. So it also depends on where your assets are and what you've saved. I think one of the big concerns will be, you know, if you're turning 65, I hope you got 25 years in front of you, and that's why you're worried that your, your savings are going to run out. And I think the biggest thing there is we are going to have to make sure Social Security doesn't experience cuts and, you know, the next 10 to 15 years. And so we're going to have to be really careful that we don't prioritize Social Security in 2025, 2026 at the expense of it in 2035, 2036. Because, you know, if you even think of some of the proposals, like let's not make Social Security income taxable when we do that, what we know is we're going to see benefit cuts earlier unless there's some major reform passed. And what we also know is what you really need is your Social Security benefits after the age of 75, because it's that living, living, living, which is fantastic, and I hope everybody gets that. But it's when you start to run out of money. And so I do hope people are looking at annuities, because I think private annuities is going to be really important given the uncertainty with potential cuts to Social Security payments in 10 to 20 years.
- [18:44]
Jean Chatzky
When you say that you hope people.
- [18:46]
N/A
Are looking at private annuities, what kind of annuities? How would you suggest they use these products? Right. We know that people also need market growth. That has shown to be incredibly important. But we tuned into one of the recent podcasts that you did with Justin, and you were talking about this phenomenon where people save and save and save for retirement, and then they turn around and they don't spend their money. Right. They're not spending down out of fear. They're not spending down because they're afraid that the money is going to evaporate before they run out of time. And also because there's this crazy perception that we should never spend our principal. Annuities go a long way to solving that problem.
- [19:33]
Jean Chatzky
But I think a lot of people.
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N/A
As with the reverse mortgages you were talking about, are really not sure how and when to use them.
- [19:41]
Betsy Stevenson
Well, I think the thing to think about is what you want is insurance against living a long time. That sounds so weird, right? It's insurance against a good thing. But the problem is that when you live a long time, then you need a lot of money because each year you want to be able to spend more. So what you want to be thinking about with your annuity or your reverse mortgages is I want to pay to ensure that I have income if I live past a certain amount of time. You don't need an annuity for most people to be thinking about in your 60s or even your early 70s. Your annuities are going to be your insurance against winning, you know, the lifetime lottery and living, you know, to be 100. And so what you want is to make sure that you have a portfolio where your insurance in the form of annuities or reverse mortgages is kicking in once you sort of passed median life expectancy. And then you should be thinking, you know, then you can think about, okay, if my annuities are going to take care of me when I live a long time, I can actually spend more of what's left in the years when I'm going to be most active, perhaps in my 70s. I think the other thing people really have to be asking themselves is when you said, like, you know, 4 million people turn 65, 70 is the new 65. So you don't necessarily want to be thinking, I'm 65, what's gone wrong with my life if I'm not retired? You actually do want to think about your health. I want to think about how do I transition and what do I think my longevity will be, and how do I want to spend those years and how much money do I have to spread across it? I know a lot of times people say, well, the thing about leaving my principal is that I know that I'm leaving something for the people I care about that I'm leaving behind. But at the same time, I do think a lot of people end up underspending. I always say, in hindsight, if I could go back and give money to my grandparents, I would because they had a much lower standard of living than I've had at any point in my life. But yet at the same time, they died with a lot of their principal intact and left in, you know, inheritance for their children and their grandchildren. And not a big inheritance. But it's really was left their principle behind. They were liv, you know, trying to live off of the earnings. And I wish they had structured it in a way that, you know, to me, the ideal thing is to go with nothing.
- [22:39]
N/A
Famous book said, right?
- [22:41]
Betsy Stevenson
Yeah. The goal should be to die broke. And you know, God bless the bank that told my mom, my mom and dad refinanced their mortgage in their late 60s to take a low interest and they re and to lower their payments and they refinanced for 30 years. And my mom said to the bank, I'm not going to live long enough to pay off this loan. I feel really bad taking it out. And the woman said, honey, you can't take the house with you. We'll get it when you go. If it doesn't get paid off.
- [23:18]
N/A
Oh, my goodness.
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Jean Chatzky
But it gave them a much better.
- [23:21]
N/A
Standard of living throughout the rest of their life.
- [23:25]
Betsy Stevenson
Yes, exactly. And so it's difficult to do right now because mortgage rates are high. But if mortgage rates go low again and you can get a rate as low as what you currently have, if you're a few years away from paying off your mortgage, just refinance that thing, take the equity out of your house, give yourself a lowish payment, and then put the rest of that nest egg somewhere. You can do your own reverse mortgage as long as you're not gambling with it and lose your house. But I mean, this is the big mistake I see people make is they die with 100% paid off house that is worth a half a million dollars or more and they should have been eating that house all along.
- [24:14]
N/A
As we sort of head into the tail end of this conversation, Betsy, what are the things, if you were to give a list of just a few things that you think people in this age group should be thinking about or doing in the next couple of years to set themselves up for that solid retirement.
- [24:38]
Betsy Stevenson
I mean, I'll tell you what I tell my parents. It's exercise. If you can stay physically active and you don't fall, then we spend less money on caretakers. So I just. It's a really important thing to realize that investing in that physical health is also investing in your financial health, because a lot of the money you're going to spend in your later years reflects the health needs that you have. If you don't take care of yourself physically, it's not like you're going to keel over at 75. You're still going to be alive. You're just going to be less mobile and you're going to need a lot more care. You're going to potentially need to live in a retirement community that can care for people who are weaker, who are more fragile, who use a walker. And that's really Expensive. So even though it seemed like I was being facetious when I said exercise, I actually think these things are really, really connected.
- [25:35]
N/A
No, I totally agree with you. I wrote a book called Age Proof with a doctor, and the subtitle was Living Longer Without Running out of Money or Breaking a Hip. And you need to be able to get your up off the floor if you fall. My mom died in her 80s, but before she died, she was seeing a trainer twice a week, right?
- [25:56]
Betsy Stevenson
So I mean, investing in a trainer today can mean you might say, well, oh gosh, should I spend a hundred bucks a week on going to a trainer? But it might mean that you save a hundred bucks a week later down the road and not having in home care. And you're also healthier and happier. So even if you broke even, if it came out even, you might be ahead when you put the whole thing into perspective. So I think that that is actually really important. And then I think the other thing is you have to really think about all the different possibilities. What would you want to happen if you lost your spouse early, if you went first, if you do become immobile? Do you want to live near your kids if you need care? Thinking through these things can be so painful and hard, but it can allow you to make decisions early on. You know, if you live a thousand miles away from any of the family that would look after you as you age and need more assistance, you might want to move closer when you still have time to build, you know, friends and community in this new place you're going to live because it's pretty miserable to move and then be reliant on family with no peer, friends, or no real access to the community. So trying to think in advance of what you need to do. And then that can also help you figure out things like how much should I be spending today? How much do I need to be putting into an annuity that will insure me against living a long time? How long should I stay in my house? Should I downsize? All of these are questions that you need to be able to ask yourself and really make a plan. And so I think the biggest mistake people make is these things are hard to think about and things that are hard to think about. People often procrastinate, but unfortunately, every morning when we wake up, we are a day older and a day behind on something we probably should have done the day before. It is all about thinking about probabilities, which I know is not natural for everybody. And then what would you want to happen in that particular state of the world and what would you need for that? And then you can start to back out. A real plan. I'll tell you some advice the veterinarian gave me. We're thinking about my dog towards the end of his life. She's like before he my dog is now a large breed, 14 year old dog. So he's pretty, pretty old. And she'd said before he really starts to age, think about what brings him joy in life and then figure out how you're going to continue to be able to provide that. And I think there's something that's very similar for people. Think about what brings you joy in life. If you're social, you're going to need to figure out how do you stay social? If you like to read, how are you going to be able to continue to do that? Particularly if you're losing your eyesight? Do you switch to audiobooks? The earlier you make the change, the easier it's going to be to adjust. So try to make your changes early by anticipating where you need to go to keep the joy in your life.
- [29:27]
N/A
Fantastic.
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Jean Chatzky
Happy 2025 Betsy.
- [29:29]
N/A
Thank you so much for doing this with us today.
- [29:33]
Betsy Stevenson
Well, happy 2025 to you and your listeners.
- [29:37]
N/A
And everyone should go check out Betsy's podcast.
- [29:40]
Jean Chatzky
It is called Think like an Economist.
- [29:43]
N/A
Something we should all try to do on a regular basis.
- [29:46]
Jean Chatzky
If you love this episode, please give us a five star review. On Apple Podcasts, we always value your feedback and if you want to keep the financial conversations going, join me for a deeper dive. HerMoney has two incredible programs. Finance Fix, which is designed to give you the ultimate money makeover, and Investing Fix, which is our investing club for women that meets bi weekly on Zoom. With both programs we are leveling the playing fields for women's financial confidence and power. I would love to see you there. Her Money is produced by Hayley Pascalides. Our music is provided by Video Helper and our show comes to you through Megaphone. Thanks for joining us and we'll talk soon.