Confronting the Special Challenges Women Face in Planning for Retirement 

     By: David K. Carboni, Ph.D., CFP®

     According to a recent study by the Society of Actuaries (SOA), women face special risks in retirement.  The study, The Impact of Retirement Risk on Women, suggests that an overwhelming majority of women have a very poor understanding of their own longevity and what it will take to support that longer life-span.   Olivia S. Mitchell, Professor of Insurance and Risk Management at the Wharton School, University of Pennsylvania, indicates that one of the reasons that many women are unprepared for retirement is that people, in general, have a very low level of financial literacy.

     According to the SOA study, the risks women face in retirement from an actuarial standpoint differ considerably from those facing men.  According to the study, the five key issues that women face and fail to adequately plan for include:

     ►Outliving their assets

     ►Widowhood’s financial challenges (as well as emotional)

     ►Potential for Chronic Disability, either mental or physical

     ►Cost of health care

     ►Economic Factors

Many of these issues occur because women tend to outlive men and because older women are much more likely to be widowed than men.  On average, a 65 year old woman can expect to live into her 80s, with many living well into their 90s.  In contrast, a typical 65 year old man can expect to live about 17 more years, with far fewer surviving into their 90s.  Also, widowhood falls disproportionately upon older women.  Over 85% of women age 85 or older are widowed, while only 45% of men over 85 are.  Because traditionally women have been younger than their husbands, and, along with their longer life expectancies, women can experience widowhood for periods exceeding 15 years or more.  For many women, the loss of a spouse comes with a decline in standard of living.  Of women over 65 living alone, 40% depend on Social Security for virtually all their income. 

     At first glance these numbers can be intimidating.  The good news is that there are resources and tools to help many female (as well as male) employees with the tasks.  For example, eligible employees can make "pre-tax" contributions to company sponsored 401k and 403b Tax Deferred Savings Plan.  Many employers also match employee contributions. 

     These plans grows tax-deferred until you make withdrawals from the account in retirement.  Tax deferral allows funds that would have been lost in taxes today to compound for your benefit.  In addition, when you withdraw these funds in retirement, you will likely be in a lower tax bracket, further reducing the tax bite on these funds.  While employees then have the responsibility for managing the investments in their tax-deferred savings plans, most plan sponsors provides a variety of tools to help.         

     Many employees often overlook the opportunity of saving "just a little bit more" for retirement.  The Table Below shows the impact that "saving a little more" can have on the amount you can accumulate at age 65.  (The Table assumes a 7% annual rate of investment return).

Age Employee 401k Contributions Begin

Contributes $100  more a month

Contributes $200  more a month

Contributes $300  more a month

55

$17,409

$34,818

$52,227

45

$52,393

$104,788

$157,181

35

$122,700

$245,400

$368,100

25

$263,983

$527,965

$791,148

*Assumes 7% Annual rate return

     As mentioned earlier, another retirement challenge women face is the risk of outliving their assets.  With traditional pension plans (that guarantee a life-time income) less common, women must confront the possibility of living longer than their nest egg can support.  One way to manage this risk is to convert a portion of one’s assets to a life time income (i.e., "annuitizing" the asset).  Only insurance companies (through payout annuities) can offer this guarantee to pay you a set amount of income beginning at a pre-set date.  Generally, once the payments begin, they will continue for the rest of your life, regardless of how long you live.  In most cases, the payout amount will depend upon how much money you annuitize,  your age when the payments begin, and the level of interest rates at the time you annuitize.*

*There are many different types of payout annuities and they will be the topic of a future article.            

 

- 7/28/2011