The Independent Woman’s Guide to Retirement
Chapter 1: Why Retirement Planning is Different for Women
Chapter 2: Understanding Your Needs in Retirement
Chapter 3: Understanding Social Security
Chapter 4: Utilizing Your Employer’s Retirement Savings Plan and Individual Retirement Accounts
Chapter 5: Plan Ahead
Chapter 6: Consider Working with a CFP® Professional
Financial planning for women is different from financial planning for men and so is retirement planning. Why?
Well, a longer life expectancy means that you’ll have a greater risk of outliving your retirement savings. But there are also other financial challenges that women planning for retirement typically face.
It’s common knowledge that women, on average, earn less than men, which means that they generally have less money to save and invest. Over a working life, this can add up to hundreds of thousands of dollars.
As a woman, you’re also more likely than a man to take time away from your career to raise a family, which means that your cumulative earnings over your working life will be relatively lower. And, less income and fewer years working mean that at retirement your Social Security benefit will be lower.
Women are typically more conservative investors than men, which means that the dollars you’ve saved for retirement probably won’t grow as quickly.
Women are more likely to take on the primary caregiving role for elderly parents. This can mean more time away from your career, which means less time to save for retirement and fewer working years counted for your Social Security earnings history.
Because retirement planning for women is different, and because independent women may face financial challenges that men typically don’t, it’s all the more important to understand what your needs in retirement will be. Financial independence for women in retirement starts with a picture of what your ideal retirement looks like.
Where would you like to live when you’re retired? How would you like to spend a typical day? Would you like to travel, to visit your kids or grandkids, to devote more time to causes that are important to you?
Once you’ve developed a clear vision of how you’d like to enjoy your retirement, you can use it as the foundation for your retirement plan. A good retirement plan will include all of your financial goals, like your income needs in retirement, expenses for health care, and other one-off or “big ticket” expenses like travel, charitable giving, periodic home repairs or upgrades, and support for loved ones.
With your financial goals defined and prioritized, you can then look at the resources you’re likely to have available in retirement to pay for them.
What is Social Security?
Social Security is an insurance program run by the federal government, designed to provide benefits to American retirees, their survivors, and workers who become disabled.
The program is funded through contributions from active workers, usually through payroll withholdings where they’re employed. Anyone who has paid into the Social Security system for at least 10 years is eligible to receive retirementbenefits.
Social Security will replace a percentage of your pre-retirement income, based on your lifetime earnings. The portion that it replaces is based on your highest 35 years of earnings and will vary depending on how much you earn and when you decide to claim your benefit.
When You Can Begin Receiving Social Security Benefits
You can receive an early retirement benefit at age 62, while a higher monthly benefit is available at your “full retirement age.” If you were born between 1943 and 1954, your full retirement age is 66. If you were born between 1955 and 1959, your full retirement age is between 66 and 67. And if you were born in 1960 or later, your full retirement age is 67.
If you’re willing and able to delay taking your Social Security benefit beyond your full retirement age, you can do so until age 70, and your benefit will be increased.
Spousal and Ex-Spousal Benefits
But what if your working career was limited, because you took time out of the workforce to raise your family or to care for an elderly parent, and you don’t think you’ll have 35 years of earnings?
If you’re married, you may be eligible for a spousal benefit that is higher than your own benefit. If you’re at least 62 and your spouse is eligible or is already receiving retirement or disability benefits, you’re entitled to a spousal benefit.
A spousal benefit is equal to up to one-half of the worker’s retirement benefit. So, if you qualify for a Social Security benefit on your own record, but a spousal benefit would be larger than your own benefit, the Social Security Administration will pay you your own benefit, plus an additional amount so that the combination equals the higher spousal benefit.
Note that if you begin taking benefits between age 62 and your full retirement age, the benefit amount will be permanently reduced, and also that your spousal benefit is based on your spouse’s benefit at full retirement age (i.e. your spousal benefit won’t go up if your spouse delays taking Social Security beyond full retirement age).
What if you’re an independent woman planning for retirement who’s no longer married? You may be entitled to receive an ex-spousal benefit if:
- you’re currently unmarried
- your prior marriage lasted 10 years or longer
- you’re age 62 or older
- your ex-spouse is entitled to Social Security retirement or disability benefits
And if you’re divorced and your ex-spouse passes away, you could be entitled to receive a surviving ex-spousal benefit, as long as your marriage lasted 10 years or more. Your survivors benefit is based on the earnings of your deceased ex-spouse. If you’ve reached full retirement age, your survivors benefit will be 100% of your deceased ex-spouse’s benefit. If you decide to claim your survivors benefit before your full retirement age, then your benefit will be a reduced percentage of your deceased ex-spouse’s benefit.
As a surviving ex-spouse, if you remarry after age 60, the remarriage won’t disqualify you from eligibility to receive a survivors benefit.
When to Claim Your Benefit
If you’ve accumulated enough credits for Social Security so that your own benefit is larger than any spousal or ex-spousal benefit you might be eligible to receive, you’ll need to determine whether or not it makes sense to take your benefit early, at full retirement age, or as late as age 70.
For most, the answer to this question depends on two factors: how long you’ll live, and whether you have other resources for retirement income if you delay taking your Social Security benefits.
Your Social Security benefits are increased by 8% for each year you delay taking them after full retirement age. So, your benefit at age 70 will be 24% higher than it would be at age 67. But if you wait until age 70 to start taking benefits, you’ll miss out on 36 months of payments. To recoup that missed money in the form of higher payments that start later, you’ll need to be fairly confident that you’ll live well into your 80s. And you’ll also need an adequate source of income to live on until your delayed, higher Social Security benefits start. That could be a pension, retirement savings, rental income, or proceeds from a reverse mortgage, to name a few examples.
If you’re not confident you’ll live longer than average, or if you don’t have sufficient other resources, it probably makes sense to start taking your Social Security benefits at full retirement age. A financial advisor specializing in retirement planning for women can help you decide the best time to begin taking your benefits.
Social Security provides a foundation of retirement protection. But the benefits are more modest than many people think – the average Social Security retirement benefit in 2019 was about $1,470 per month, or about $17,640 per year. And for the average wage earner, Social Security will only replace about 35% of their pre-retirement income. So, women planning for retirement need additional savings to supplement their Social Security benefits.
You are likely aware of the well-known 401(k) and 403(b) plans. These plans don’t provide a guaranteed pension benefit at retirement, but instead permit you to contribute a defined amount of your pay to a retirement account in your name. Your contributions may be matched or supplemented by your employer. The contributions and earnings in your account grow tax-deferred until you’re ready to begin taking distributions, typically at retirement. Crucially, though, the amount you’ll have saved at retirement is not guaranteed – it depends on the growth of your investments over time – and so your income at retirement is also not guaranteed.
From a tax perspective, there are two types of defined contribution plans – “traditional” and “Roth”. In a traditional plan, you don’t pay state or federal income tax on the portion of your pay that you contribute to the plan – it’s a “pre-tax” contribution. When you eventually take distributions from your account, each payment will be taxed as ordinary income. In contrast, in a “Roth” plan, the portion of your pay that you contribute to the plan is done after you’ve paid state and federal income tax. But when you take distributions from your account, each payment will be tax-free.
The amount that you can contribute to your account each year is capped, and typically increased a bit every year or two to reflect inflation. For 2020, the maximum employee contribution amount is $19,500. For workers age 50 or older, an additional $6,500 catch-up contribution (for a total of $26,000) can be made.
There are several good reasons why women planning for retirement should participate in their employer-sponsored retirement plan. Here are just a few:
Your contributions to the plan are made via payroll deductions every pay period. There’s no need to write a check. And with payroll deductions, you’re effectively paying yourself first.
Possibly, Free Money
Data shows that the majority of employer-sponsored offer some sort of matching contribution to encourage participation. This is literally “free money” – and something you shouldn’t pass up, if at all possible.
As noted above, with a traditional plan, your contributions are tax-deductible, lowering your taxable income, and the growth in your account is tax-deferred.
One of the major attractions of defined contribution plans is the compounding of growth in your account. In a nutshell, all the earnings are kept in your account, so that you earn a return on your contributions plus past earnings – a snowball effect. In the short term, the gains from compounding look small. But over the long term, the growth is exponential.
Because defined contribution plans are “participant-directed”, you’ll have the opportunity to decide on your own investment strategy from a list of approved investments picked by your employer. Your investment mix should be based on your age, investment horizon, and tolerance for investment risk.
But what if you’re self-employed, or your employer doesn’t offer a defined contribution plan?
If you’re self-employed, there’s good news – you can simply set up a self-employed, or “solo” 401(k) plan for your business. There are a wide variety of no-cost or low-cost options available, and most large financial institutions (banks, brokerage firms and mutual fund companies) offer these plans.
If you work for a company that doesn’t offer a plan, and your employer isn’t interested in setting one up, then your choices are more limited.
The best option is to save in a traditional or Roth Individual Retirement Account (“IRA”). The tax treatment of IRAs is basically the same as that for defined contribution plans – contributions to a traditional IRA are tax-deductible, but distributions are taxed as ordinary income, while contributions to a Roth IRA are made with after-tax dollars, but distributions are tax-free.
The downside with IRAs is that the contribution limits are much lower than for defined contribution plans. For 2020, the annual IRA contribution limit is $6,000, with an additional $1,000 catch-up contribution possible for those age 50 and older.
It’s important to note that it’s possible to contribute to both a defined contribution plan and to an IRA in the same year. Participating in one doesn’t preclude you from participating in the other.
You’ve built a plan for your ideal retirement, and you’re participating in your retirement plan at work to accumulate additional resources to supplement your estimated Social Security benefit. Your plan looks solid, and you’re confident that you’re on the right path.
Have you also considered what might jeopardize your plan?
There are a number of things that can throw a solid financial plan off-course, much like storms, headwinds or lulls can change your course when sailing – things like higher taxes, lower investment returns in the future, or higher inflation. But the two biggest potential risks for women planning for retirement are longevity and needing care later in life.
Women tend to live longer than men, on average. Depending on your family health history, it may be appropriate for your plan to assume you’ll live well into your 90s, or perhaps even longer. There are now more American centenarians than ever before, and the number is growing every day as our population ages.
With a longer life expectancy comes an increased risk of outliving your resources. One way to address this risk is to explore buying an annuity from an insurance company. In exchange for a lump sum payment, the insurance company will make regular payments to you for a period you choose – for example, at least 10 years, at least 20 years, or for life. Annuities can be attractive for those who are confident that they’ll live longer than the insurance company thinks they will.
As America’s population ages, more of us than ever are finding ourselves caring for ageing parents or relatives. Women planning for retirement should consider whether they may require some level of care later in life, as well. To address this risk, you can buy long-term care insurance, which provides benefits if you’re unable to perform or need assistance with certain so-called “activities of daily living.”
Whether long-term care makes sense for you is a function of several variables: your family health history, your resources, and your need to shift some or all of the risk to an insurance company.
Long-term care insurance can be expensive, and there is a fairly simple reason for that: people who own these policies tend to not let them lapse, and a high percentage eventually make claims on their policy.
If you’re not confident that you’ll need care later in life, or that if you do, it will be for an extended period, you can consider putting in place a “home equity conversion mortgage” – also known as a reverse mortgage – on your home, which will give you the flexibility to access some of the equity in your home to cover long-term care expenses, should you need to.
If the thought of building your own financial plan, and managing your own investment and retirement accounts in a prudent, professional manner, seems like a daunting task, consider hiring a financial advisor to help you.
While it may seem tempting to start your search for a competent, ethical and experienced advisor with recommendations from family members, friends or neighbors, there’s a more reliable and thorough way to approach it.
Start by looking for advisors who hold the CFP® credential. The CFP® – or CERTIFIED FINANCIAL PLANNER(TM) – certification is the most widely recognized financial planning designation. In order to earn this certification a financial planner must (a) complete a college-level, board-approved program of study in personal financial planning, (b) pass a comprehensive two-day exam, (c) have three years of experience or two years as an apprentice, and (d) commit to following the CFP Board’s Standards of Personal Conduct.
For these reasons, the CFP® designation is generally considered the gold standard credential for financial advisors.
There are online resources that you can use to begin your search for a CFP® professional, including the websites of the CFP Board itself, the Financial Planning Association, and the National Association of Personal Financial Advisors.
As a woman planning for retirement, there are some other important criteria that you should consider using in your screening process:
Look for an advisor who’s independent, as independent advisors typically face fewer conflicts of interest than those employed by large financial services companies.
Look for an advisor who’s compensated only by fees from their clients, rather than from commissions for product sales. A fee-only advisor won’t be incentivized to sell you high-commission, potentially unsuitable products you probably don’t want or need.
Life experience is important, and no less so when dealing with the volatile cycles of the investing markets. An experienced advisor will have gone through a few of these tumultuous periods, and is more likely to stay objective and even-keeled when advising you on important decisions. Ideally, this experience will also include working with clients like you.
Finally, consider some subjective criteria, too, because this will hopefully be an important, long-term relationship for you. For example, do you have a preference for a male or female advisor? Would you prefer working with an advisor who’s younger than you, older than you, or generally your age? Is it important that your advisor is geographically nearby? And perhaps most importantly, do you feel like you have a good personal rapport with the advisor?
Selecting an advisor who you like, trust, and will enjoy working with can make financial planning a pleasant, empowering experience.