Given longer lifespans, lower average incomes and the responsibilities of caring for children, grandchildren and aging parents, women face several unique challenges as they save and plan for retirement.
It doesn’t help that rising healthcare costs eat away at their savings, nor that their retirement accounts tend to be significantly smaller than men’s. With nearly double the savings shortfall – $522,000 compared to men’s $267,000 – the retirement crisis is hitting women the hardest.
Fortunately, advisors have an opportunity to help clients – married or not – address these risks. From tax-efficient investment and distribution strategies to better budgeting, there are a variety of ways to stretch a nest egg over a long lifespan.
In Part 1 of this series, we discussed the specific challenges women face in retirement. Now, we’ll cover some of the strategies clients can use to address those challenges, making the most of their available assets andtime as they work, save and plan for their futures.
Women bear most of the responsibility in caring for aging parents. A full two-thirds of unpaid caregivers are female, and female caregivers spend 50 percent more time providing care than their male counterparts. Likewise, many families put retirement saving on the backburner to prioritize their kids’ college funds.
But de-prioritizing retirement will only come back to bite the client and the people they care for.
“Saving for retirement needs to be a non-negotiable in your financial planning life,” says Karen Wimbish, senior vice president at U.S. Bancorp Wealth Management. “It’s relatively easy to borrow money to send your kids to college, but nobody lends you money to retire.”
After all, if a client doesn’t take care of her own finances, her kids (whose educations she funded) may have to take care of her later on. Becoming a burden is a top concern among boomer retirees – for women even more so than men – but explaining the long-term impact could keep a family on the right track with 401(k) contributions.
Longevity, lower pay and the retirement savings gap make it tough to provide for lasting retirement income. Inflation is also an ever-present concern, particularly when you consider the impotency of Social Security’s cost of living adjustment in the face of rising Medicare premiums.
So how can female clients maximize retirement income and hedge against inflation?
“They should invest more proportionally and invest more toward growth,” says Edward Jones’ Jennifer Marcontell, one of Barron’s Top 100 Women Advisors. “The time to take risk is when you’re younger. Millennials watched their parents get devastated, and while research shows they’re good savers, they’re much less willing to take risks.”
Retirement could last 30 years or more for a particularly healthy woman, and the assets she saved must grow significantly to last.
Aside from higher equity allocations in their 401(k)s, women might also want to prioritize after-tax investments during the accumulation phase.
“If someone’s been out of work for a while and they have discretionary income to save, another option is to build non-qualified assets,” says Courtney Horn, Women’s Choice Award-winning financial advisor with Minkoff and Associates. “It’ll help you maximize tax efficiency later on.”
A Roth IRA serves a similar purpose, though women who earn too much or who’ve left the workforce altogether won’t qualify. A brokerage account doesn’t offer the same tax-free distributions, but its gains will only be subject to capital gains tax, and it provides excellent liquidity with no required minimum distribution or early withdrawal penalties.
Finally, a deferred fixed annuity can provide lifelong income and peace of mind, albeit at a risk.
“If you don’t use it before you die, you don’t really get your money back,” says Horn. “If you’re really worried about running out of money, though, it’s a much less expensive type of annuity that gives you an income benefit when you turn a certain age.”
They’re not for everyone, but depending on a woman’s age, risk tolerance, health and available assets, it could be a solid addition to her portfolio.
Social Security timing
When the accumulation phase ends and distribution begins, one of the most critical decisions will be when to take Social Security. Eighty-three percent of women collect early, often filling at the same times as their husbands, forfeiting up to a quarter of their benefits. In doing so, they may see up to 70 percent of their benefits eaten up by Medicare premiums and other monthly healthcare costs.
“Women should compare their benefit with their spousal benefit – 50 percent of their husband’s – and pick the biggest one,” says Wimbish. “At a minimum, wait until the full retirement age, and if there’s any way you can delay to 70, that’s the best guaranteed return in town.”
If a woman’s benefit is smaller, however, and if her spouse has yet to file, she can still draw her own benefit in the meantime – albeit at a penalty. For instance, if a woman’s primary insurance amount is $800 per month, she’d get about $600 collecting at 62. If her husband retires when she’s 66 and half of his benefit is $1,200 per month, she’ll get her original $600 plus half of the $400 difference.
Managing healthcare costs
Due to greater longevity, a healthy 55-year-old woman will spend $79,000 more than a male on healthcare expenses in retirement. Tax-deferred distributions and Social Security income can cover these costs, but more efficient funding vehicles are available.
“I’m a big believer in putting as much as you can into an HSA and not touching it until you retire,” says Wimbish. “It’s one of the great new tools we have, and I don’t think companies talk enough about its value.”
HSAs provide tax-free contributions, growth and withdrawals and can be used to pay for Medicare parts B and D and Advantage.
Unforeseen medical expenses are another reason to contribute to after-tax accounts. For a family relying on 401(k)s and Social Security, a major medical bill could bump them up a tax bracket or two. A woman with a sizeable Roth IRA or brokerage account, on the other hand, could keep taxes under control while weathering a crisis.
Savings vehicles aside, proactive health management is key to keeping costs manageable, not to mention maintaining quality of life.
“Encourage clients to use one credit card just for medical expenses to keep track,” says Marcontell. “Also, don’t wait to address health issues.”
Acute problems are far cheaper and easier to address, while chronic conditions will lead to significant recurring costs – including dependency on caregivers.
Even the best savings and investment strategies won’t help a client whose preferences aren’t heard – and who doesn’t understand the reasons behind them.
“The No. 1 thing women need is better engagement in the planning process,” says Wimbish. “As an industry, we need to understand we’re working with real people, real money and real fears, and there’s a need for education. Make things crystal clear and make them comfortable asking questions.”