There’s good news and bad news about retirement planning for women.
First, the good news: Women live longer than men. Simple Pay Day, a UK same day loans lender, reports there are 6 million more women than men age 65 and up. Of those aged 85 and older, 68 percent are women. In other words, if you are a woman the odds favor you’ll enjoy a nice, long retirement.
Now for the bad news: If you live longer you’ll need to save even more money to pay for all those extra years.
This creates a financial challenge because women tend to earn less and subsequently save less. In addition, you face issues like time away from work for maternity leave or part-time work to accommodate childcare schedules. Putting these factors together creates a one-two punch for women’s retirement planning – lower average income and savings means less money for retirement, but greater longevity requires more money for retirement. It’s a conundrum that can jeopardize your financial security if you don’t plan carefully.
Let’s take a closer look at how retirement planning for women is getting squeezed by both factors and what you can do to solve the problem.
Increased longevity changes everything in retirement planning.
The first thing it changes is your ability to spend principal. For example, a 40 year retirement requires you to live exclusively on income in the early years because you can’t safely amortize your savings over such a long period. Conversely, a 10 year retirement allows you to safely spend 10% of your savings every year and is much easier to manage. The simple rule is that the longer you live the less principal you can spend requiring greatly increased savings.
The second change to women’s retirement planning because of longer lifespan is greater uncertainty. For example, inflation isn’t a big problem for short retirements (10 years), but the compound effect of small changes in inflation over 40 years is dramatic. The longer you live the more change you will encounter and the greater the uncertainty you must plan for.
Always remember that retirement planning is no better than an educated guess about an unknowable future. This uncertainty means you must build in a margin of error. The next 30 years will be far different than even your wildest thoughts could imagine. If this fact isn’t intuitively obvious then just try remembering what your life looked like 30 years ago – what car you drove, how much you spent, the telephone and computer you used, and what you did with your time. Could you possibly imagine life today from where you stood 30 years ago? Why should the next 30 years be any different?
There is no solution to uncertainty except to plan conservatively by including pessimistic assumptions in your retirement projections. For example, every retirement planning calculator requires you to input assumptions for longevity, inflation, investment return, and other factors. Rather than input industry standard assumptions like 3% for inflation and 8% for investment return, try varying the input with optimistic and pessimistic assumptions.
For example, try 5% for inflation, 6% for investment return, and living to age 100 to create a pessimistic (high savings requirement) scenario. Additionally, try 3% inflation, 10% investment returns, and average life expectancy for an optimistic (low savings requirement) scenario. When you know the impact of how uncertainty can affect your financial needs in retirement then you can adjust your plans to protect from that outcome.
The truth is you can never absolutely know how much money you need for retirement. Increased longevity causes unknowable risks with investment return and inflation that makes your biggest risk outliving your savings.
Plan accordingly and be conservative so that you are prepared.
Become A Student
Nobody cares about your money as much as you do.
It might feel comforting to believe your financial adviser (or other financial “expert”) will take care of everything and you don’t need to understand about investments and finance, but you would be deceiving yourself. In the end you are self-responsible. You must become your own expert.
You must become a student of investments and personal finance if your goal is financial security. You must grow your financial intelligence at least as fast as your grow your savings because there is nothing more dangerous than $100,000 of financial decisions being made with only $100 of financial intelligence.
Defy the statistics that say you will live in poverty by increasing your knowledge about how retirement planning works.
Have your own plan
Don’t assume that your spouse’s savings will take care of all your retirement needs. Since you could be spending part of your retirement alone it’s important to establish your own retirement accounts. Make automatic deposits into this account so that you aren’t solely dependent on the joint plans you share with your spouse.
Know Your Benefits
Most human resource departments give little more than an overview of your retirement plan, life insurance, and other workplace benefits. Be wise by drilling down to the details so that you know what will happen to your income if you divorce or become widowed, as well as whether you can take your life insurance with you when you move to a new job. These details matter.
If you are considering a new job, seek out one with a good retirement plan. Traditional pensions can be wonderful (but are rare). If the retirement plan is self-funded then find an employer that will match all or part of your contributions. Unless you are aiming for early retirement by way of a business or real estate investments, plan to work as long as necessary to fund your retirement and your Social Security benefits.
Involve yourself in the family finances so you have a clear understanding of all your sources of income. Pensions, retirement plans, Social Security, personal savings and investments all should be considered when planning your retirement. Know where all of your money is coming from and how it is managed. That includes your spouse’s retirement plan or income as well as your own.
Know The Rules On Divorce
Get clear on the rules affecting the dispersion of joint assets such as a pension or a retirement plan in case your marriage dissolves. Understand what happens in divorce and whether you will be required to submit a special court order, known as a QDRO, to receive any of your ex-spouse’s retirement benefits.
Also, make sure you understand how your Social Security benefits will be impacted. Certain guidelines entitle you to 50 percent of your ex-husband’s benefits if you were married for at least 10 years. However, that benefit may stop and get replaced by payments based on your new husband’s benefits should you remarry. Check with the Social Security administration for current rules.
Know Your Survivor Benefits
If your spouse dies, you may be entitled to a benefit paid by his pension plan; however, you will need to know if the pension pays last surviving spouse or if it ends with your husband’s death. Similarly, be careful about signing away your rights or accepting a lump-sum payment. Discuss this issue with your spouse in advance so you can agree on the best course of action.
You also may be entitled to your late husband’s Social Security benefits, provided you do not remarry prior to age 60.
Building a financial survival kit
Only one quarter of Americans have enough emergency savings to cover six months or more of expenses, according to Bankrate, a major provider of financial rates and information for major broadcast outlets like CNN and the New York Times. It’s easy to skip saving money in favor of paying off debt or just spending it elsewhere. Stop living paycheck to paycheck and start preparing for long-term financial health by setting up a financial emergency kit. Your kit should include diversified savings and physical documents.
At a Moment’s Notice Money
Whether you call it Murphy’s Law money or a Rainy Day fund, the purpose is the same. The unexpected — like a trip to the emergency room, car repairs or a burst pipe at home — will happen eventually. On his website, financial guru Dave Ramsey explains that an emergency fund keeps unexpected expenses from “turning into new debt while you work off the old debt … [which helps you] break the cycle of debt of loans and credit cards.” A savings account with a debit card or checkbook containing $500-$1,000 is ideal. You’ll be able to access the money without going to the bank. Just remember to rebuild this fund anytime you deplete it.
Short Term Savings
These funds keep you afloat if you lose your job or any other significant source of income. At the very minimum you should save for two months of bills and expenses; four to six months would be ideal. These expenses would include housing, car payments, insurance, utilities, minimum payments on debt and money for food. Plan for anything you can’t live without or get rid of on short notice.
Certificates of Deposit are a great way to maintain your short term savings. They have great rates and are simple to set up. Keep in mind that you do have your “at a moment’s notice money” ready, you’ll need to set up short term savings with rolling availability.
Long Term Savings
When it comes to long term savings the key to success is to diversify. Companies, banks, governments and currencies can fail. That stock that was a “sure thing” might make you rich, might not fluctuate much or might be rendered worthless after a corporate scandal. After the civil war, confederate paper currency had so little value it was better used as insulation than money. For just about all of recorded history, gold has been consistently a good investment. Good sources for gold include the US Money Reserve for coins and reputable pawn shops for coins, bars or bullion. Gold jewelry can often be sold or traded but is a less stable investment with no simple formula for valuation.
Gather and organize any documents you need to prove who you are, what you own, and what you’re entitled to. Keep these documents in a fireproof lock box, safe or safe-deposit box. You should also make a copy of everything and store it in safe alternate location.
Government Issued ID:
- Birth certificates
- Social Security cards
- Copies of driver’s licenses and/or military IDs
- Marriage license and/or divorce papers
- Adoption papers
- Green cards or citizenship papers
- Power of attorney
- Will, estate or trust documents
- Living wills
- Insurance policies
- Property deeds
- Mortgage (or lease) records
- Household inventory (anything of value that could be claimed on insurance)
- Insurance policy
- Lien or loan documents
Personal Documents (sort by person)
- Insurance policies and cards (life, disability, medical, dental, etc)
- Medical records, prescriptions
- Doctor and hospital preferences
- Military records
- Important account numbers (bank, investment, retirement, credit cards)
- Record of any debt (mortgage, car, line of credit)
- Important phone numbers (attorney, financial adviser, bank, insurance agent, credit card cancelation)
- Petty cash
The reality is women face many challenges (and opportunities) when planning for retirement…
- Women live longer creating greater financial risk and uncertainty during retirement.
- Women require greater savings to fund longer expected retirements.
- Women earn less making saving enough for retirement more difficult.
- In addition, many women are dependent on their spouse’s benefits for retirement security and must carefully arrange all legal issues to make sure they are financially protected.
The key is to plan ahead and take full responsibility for your financial security. Nobody will care as much about your financial future as you… so take charge.
With the right plan you can secure your retirement and live a long, happy life with plenty of income to enjoy those extra years.