From the November 2008 issue of Research Magazine • Subscribe!

November 1, 2008

Retirement Planning for the Woman Who's Alone

An unfettered single life has its pluses; but women who are on their own financially -- never-married, widowed, divorced or unwed and living with a partner -- encounter unique and challenging retirement-planning issues.

Here are a few hard facts: A woman, on average, earns 76 cents to the dollar a man earns. Women's earning potential is typically 20 percent to 40 percent less than a man's. There are 10.4 million single mothers in America. For the last 25 years, women have been marrying later. The average age of U.S. widows is only 56. Social Security benefits are significantly less for a woman than for a man. Women's average life expectancy is a little over 80 years vs. 75 for men.

Obviously, there's a big need -- and big opportunity -- when it comes to retirement planning for the woman who's going it alone, and especially so in light of the unprecedented global financial crisis.

"If an advisor learns what's different about these women and how to communicate with them effectively, they will not only ensure that they'll have a client for life but they can really build a female client base: Women typically generate seven referrals if they're happy with someone -- whether their hairdresser or financial consultant," says Cindy Wieties, vice president-business development with AIG American General. She leads the "AIG for Women" financial education program.

Single women usually start thinking about retirement later than their married counterparts. That means they inevitably need to play catch-up in order to achieve their long-term goals.

Further, nowadays it is more difficult for many to enter retirement -- and certainly more so since the Wall Street meltdown.

"The old idea of turning off the lights at 55, walking out the door without looking back and putting your money in fixed-income are gone," says Mary Jo Harper, vice president and wealth management advisor with Merrill Lynch in Blue Bell, Pa.

"As a retiree, investing is almost a part-time job," she continues. "People really have to work at this if they're going to be successful at it."

The more planning and education advisors provide, the less likely women -- particularly those who are alone -- will worry about outliving their assets. This is a persistent female fear, now manifest deeper because of the current financial and economic turmoil.

Although the woman alone may have no life partner, the right financial consultant is an excellent partner when the question is retirement-planning advice.

"I always tell women to be their own CFO -- to absolutely rely on themselves. It's very important to get them to take charge and not be intimidated by finance, as are older women who are widowed or divorced after many years," says Ami Forte, vice president and wealth advisor with Morgan Stanley in Palm Harbor, Fla.

In working with women on their own, Forte continues, "Make them feel comfortable. Be extremely approachable. Diffuse the fear they have about asking 'stupid questions.' It helps you both to have a better understanding -- better for the advisor, better for the client."

Apart from investing in the traditional sense, women who are alone should invest in several other ways to protect themselves financially and to secure their retirement. Sheryl Garrett, founder of The Garrett Planning Network, with 300 member FAs, and co-author of Money without Matrimony (Dearborn 2005), tells it like it is: "There are a whole bunch of nuances to make sure you're covering your butt."

These include building good credit, saving in the woman's own name and insuring her own possessions if unmarried and co-habitating. Moreover, Garrett advises the middle-aged woman to make "a good investment in her ability to earn money." This might include switching to a less physically demanding or stressful line of work from the one she's pursued in her youth.

A comprehensive financial plan for the woman on her own is of course essential. "Women tend to think long-range better than men," Forte says. "Projections are very comforting: 'What do you need to save now to be where you want to be down the road?'"

While women can expect Social Security to be a percentage of their retirement income -- though only 39 percent after Medicare deductions for those retiring at 65, studies say -- these payments, for several reasons, should not be relied upon heavily.

Garrett, based in Shawnee Mission, Kansas, advises that, barring serious illness, women -- and men too -- should "wait until the very last moment" -- age 70 -- to sign up for Social Security benefits "because that's when you get the highest pay-out."

When a middle-aged woman is widowed suddenly and has no retirement plan, it is imperative that she link up with a financial advisor right away.

"I can't tell you how many times this is where I've stepped into the relationship," says Merrill's Harper. "The woman has never even written a check! You have to begin educating her about everything -- walk her through all the steps and talk about life issues."

Pension-Like Income and Long-Term Care InsuranceFor the older woman who is single or divorced and has put off saving for retirement, a second assured income stream, along with Social Security payments, is a fine idea.

"There are a lot of investment products today that act like a pension and offer a guaranteed income stream for the rest of your life," says Harper. "For someone who has not had a lot of investment experience, some of the guarantees tend to be attractive."

One way for widows to get set with a lifetime-guaranteed stream of income is by converting their husband's life insurance proceeds into a single premium immediate annuity (SPIA), says Wieties, in Houston.

"It becomes almost like a private pension because it replaces the lost income of the spouse," she says. In addition, the women can arrange to match her IRA required minimum distribution (RMD) amount every year. "Once she's purchased that immediate annuity, it's out of her hands, and she doesn't have to worry about managing it."

In view of recent front-page events, FAs should perhaps advise clients to split insurance policies and annuities among two or more providers.

To preserve a deceased spouse's Social Security and pension benefits, widows may want to re-think remarrying, says Garrett, whose Investing in An Uncertain Economy for Dummies (John Wiley) is due this fall.

"If she remarries, she may no longer be eligible to receive her husband's pension. I hate to burst the bubble of romance," Garrett says, "but before she goes off and gets married again, she might want to check that she won't lose that pension."

Long-term care insurance can play a critical role in retirement planning for the woman on her own. Though costly, it "helps to preserve wealth," Harper says, "and allows you to have the highest probability of achieving your life goals by taking care of the high risk of 'Who will take care of me?'

"The products have gotten a lot better," Harper adds. "Some allow you to get money back if you don't end up using it. It's like a money-back guarantee. So it can work as a wealth preservation strategy: You've hedged your bet by buying long-term care.

"This money will leverage itself out two or three times for long-term care benefits," Harper continues. "And if you don't need long-term care, you can get the cash back."

Forte recommends LTC insurance as well. "It's a little on the pricey side. But if you're ever unable to take care of yourself, it pays for itself very quickly. Some of the nicer retirement communities won't take a single person if they don't have this protection -- even though their assets are considerable." Disability insurance, against loss of income, is also important to have, Forte says. "But it's incredibly underutilized."

Feeling Vulnerable NowCo-habitation without wedlock between opposite-sex couples is up substantially over the past 30 years, according to Federal census data. But even the most committed couples present specific retirement-planning issues, especially for the woman.

For example, if the man is affluent and promises to leave the woman an inheritance upon his death, that intention should be put in writing, preferably in a trust document drawn up by an estate attorney who works with unmarried couples. If he has children by a previous marriage or relationship, a legal document becomes vital.

"One would believe that if you're in a trusted relationship, you could have a revocable living trust; but to be completely protected," says Garrett, "the trust should be an irrevocable one so that the person who created it can't change it."

Another option, she says, is for the man to take out a life insurance policy, making the irrevocable trust its owner. "This is a very cheap way to guarantee that his sweetheart gets the fair share he'd like her to receive without screwing his children out of their entitlements -- because you've actually bought another asset: the life insurance policy."

In the same scenario, the unmarried woman might want to make sure she is named as beneficiary on her partner's employee retirement plan. "Beneficiary forms override a will," notes Harper. "He can name her in a will; but if his 401(k) still has his ex-wife's name on it, the [live-in partner] isn't getting a dime."

Even if a woman is to be provided for as described above, it's wise for her to be putting money away separately, FAs say.

"Women should save on their own, always, and have some of their own assets, always. You never know what might happen," says Forte.

According to Garrett, unmarried co-habitating partners should never co-mingle assets. "You don't have the benefit of a divorce court. I'm a big fan of his-and-her bank accounts. Even if she's in a long-term relationship, she should be accumulating assets in her own name."

A single mother needs to prioritize and prepare for her own retirement before paying for her youngsters' education, Harper advises. "It's like when she's flying in a plane with her child, and [the instructions say] to put on her own oxygen mask first." A college-bound child can take out a loan for tuition, but the mother "won't be able to get a loan for retirement, which could easily be 30 years."

Term-life insurance with a return of premium can be appropriate for a single mom. Though the premium is higher, it will be returned to her at the end of the term.

"Say she bought a term of 18 years to get her child through college," says Wieties. "When that term is up, the premium is returned and she can use it for her retirement needs."

Bottom-line, what's most critical is that "every woman needs to take responsibility for her own financial security," Wieties says. "Today's advisors could benefit greatly by providing financial literacy programs across generations because women are feeling very vulnerable right now -- recognizing that they've procrastinated, that they could have ensured a much more comfortable retirement with planning and the purchase of certain products."

Garrett sees a pressing need for a fundamental strategy shift on the part of FAs and other investment professionals.

"The whole financial services industry has focused its existence on accumulation. Now," she says, "we must figure out how to support people in retirement. We've got to turn on that retirement cash-flow tap."

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