The Rules of Retirement for Women

Studies show that most women don't plan for retirement -- and ultimately pay the cost.

For women heading toward retirement, there’s good news and bad news. The good news is they’re likely to be blessed with long life. The bad news: They may not be able to afford it.

That, in effect, is the conclusion of a recent study by the U.S. Government Accountability Office. Despite the increase in women’s workforce-participation rates over the past two decades, the poverty rate in 2010 for women 65 and older was 9% -- nearly twice the rate for men, at 5%. And while 6% of widowers lived in poverty, 12% of widows were poor.

According to the GAO report, women have a tougher time saving for retirement in part because they take time out from the workforce to care for family members, and when they do work they have lower earnings than men. Other studies bear this out: Women who are 50 to 69 have about 20% less in retirement savings than men in that age group, according to a recent report by the ING Retirement Research Institute. Another report notes that while half of baby-boomer men have retirement savings of at least $200,000, only 35% of female boomers have that level of savings.

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Women who are five to ten years from retirement can take some steps to improve their financial readiness. Many of these moves can apply to women of all ages.

Maximize your own retirement benefits. If you’re looking for a new job, make sure it has a good retirement plan. It’s unlikely these days that you will find a job with a pension plan that guarantees a stream of income in retirement. But you can seek out employers that will match all or part of your contributions to a 401(k) or a similar employer-based plan. A company match is free money.

Even when married women are working, women tend to set aside a smaller amount of their income than men, says Suzanna de Baca, vice-president of retirement and wealth strategies at Ameriprise Financial Services. “The couple may decide that the woman’s income is more discretionary,” she says. “But any woman who is working should contribute as much as possible to an employer-sponsored retirement plan.” If her employer doesn’t offer a retirement plan, de Baca says, she should set up an IRA.

Indeed, Kelly O'Donnell, vice-president at Financial Engines, which provides asset management for 401(k) plans, told the U.S. Senate Special Committee on Aging at a recent hearing that men tend to save nearly twice as much as women. "Among our clients, the median 401(k) account balance for men age 60 and older is $82,000 and only $46,000 for women age 60 and older," O'Donnell said.

In 2012, you can set aside up to $17,000 (plus up to $5,500 in “catch-up” contributions if you’re 50 or older) in a 401(k). If you’re self-employed, you can make deductible contributions to a retirement plan, too, such as an individual 401(k). If you don’t have access to an employment-based retirement plan, you can make $5,000 ($6,000 if you’re 50 or older) in deductible contributions to a traditional IRA, or you make the same amount of after-tax contributions to a Roth IRA, which grows tax-free.

Working longer can help maximize your Social Security benefits. The Social Security Administration uses your highest 35 years of earnings to calculate your benefit. Any zeros -- perhaps for years you left the workforce to care for children -- will pull down the average. If you keep working, you’ll be able to raise your benefit -- and maybe knock out a zero or two.

If you’re married but not working, you can still contribute to a tax-advantaged retirement account, known as a spousal IRA. In 2012, a nonworking spouse can make a deductible IRA contribution as long as the couple file a joint return. Also, the working spouse must have enough earned income to cover the contribution.

Consider long-term care coverage. Because they have longer life expectancies, women spend nearly three times what men spend on long-term-care services -- $124,000, on average, for women, compared with $44,000 for men, according to a study by the Society of Actuaries. To protect themselves against such huge costs, many women should consider buying some form of long-term-care coverage during their fifties or early sixties.

You can buy a stand-alone policy, perhaps purchasing three years of coverage. But what could make more sense are newer products that combine long-term-care coverage with either an annuity or life insurance. If you never use the long-term-care coverage, you will get annuity payouts for yourself or leave a death benefit for your heirs. Also, the medical underwriting rules are not as tough for these policies as they are for traditional long-term-care insurance.

Rose Swanger, a certified financial planner with ING Financial Partners in Knoxville, Tenn., recommends the annuity combination products for many of her women clients. “If you use it for long-term care, great,” she says. “If not, it becomes longevity insurance down the road.”

Boost your survivor benefits. If you’re married, make sure you’re not shortchanged when it comes to your husband’s defined-benefit pension and Social Security benefits. You want to make sure you will get the biggest payout if he dies first.

For pensions, monthly payouts are usually paid out in one of two ways: either as a “single life” benefit that ends with the retiree’s death or as a “joint and survivor benefit” that ends after both the employee and spouse die. Lifetime payouts differ for each option. A single-life option could pay out $1,600 a month until the retiree dies, for instance; the joint annuity could pay out $1,300 a month until the retiree dies, then $650 to the surviving spouse until she dies.

Federal law requires the spouse to sign a consent form to waive her right to the spousal benefit. You may be tempted to take the higher, single-life payment. But if you will need the cash after your husband dies, don’t sign the waiver.

If you’re the lower earner, you and your husband can also maximize your Social Security survivor benefit. Survivors are entitled to a benefit of 100% of the worker’s benefit. When the higher earner, usually the husband, claims early, he deprives his lower-earning spouse of extra cash after he dies, especially when she is much younger.

The full retirement age is 66 for those born between 1943 and 1954. If you claim at the early-retirement age of 62, as most beneficiaries do, the benefit is permanently reduced by 25%. For each year you delay claiming benefits past age 66, you get an extra 8%, plus cost-of-living adjustments, until you reach age 70. If a couple’s goal is to boost the survivor’s benefit, the higher earner should delay as long as he can.

Learn about your household finances. With older married couples, it’s not unusual for the wife to defer to her husband when it comes to overseeing investments and household finances. Only 34% of women said they were most responsible for the financial and retirement planning, compared with 61% of men, according to a study by the MetLife Mature Market Institute and the Scripps Gerontology Center.

When Swanger meets with couples and encourages wives to take a more active role in the household finances, she has seen “husbands roll their eyes. They think they know best.” Her message to wives: “Don’t be intimidated by your husband. You can handle basic investments, too.”

A study by the Hartford and MIT AgeLab found that couples that share financial decisions generally save more for retirement than couples in which one spouse takes charge of investments. These couples also are most likely to have created a plan that assures the financial security of the surviving spouse.

Consider this suggestion from Cindy Hounsell, president of the Women’s Institute for a Secure Retirement, a Washington, D.C., education and advocacy group: Schedule a “really nice dinner” as a reward for a one- or two-day session in which both spouses get up to speed on all aspects of the household finances, including investments, insurance policies, beneficiary designations and the location of all information.

The collaboration shouldn’t end at dinner, but both spouses should continue to work together on savings and spending issues, Hounsell says. She says she has seen many new widows without a clue of what to do. “You need to have a bird’s eye view of all the details, so that you are prepared to take care of this yourself,” she says.

Demand a fair share in divorce. Divorce among couples 50 and older is at a record high. In 2009, about 25% of people who got divorced in 2009 were 50 and older, compared with about 10% in 1990, according to a report this year by two sociologists at Bowling Green State University.

It is essential for divorcing women to negotiate a fair share of retirement assets. Under state laws, a pension earned in retirement is a joint asset. If both spouses have retirement accounts, one route is to “equalize” the assets so that each spouse gets half of the total.

You should not necessarily forgo your right to the retirement pension income stream in exchange for the house. You could end up with a mortgage, property taxes and maintenance costs that you can’t afford -- and be forced to sell in a declining real estate market. “A pension will bring in money for the rest of your life, but a house will have the costs that houses have,” Housell says.

If you plan to ask for a share of your husband’s employer-based retirement benefits, make sure you get a court order, known as a qualified domestic relations order, in addition to the divorce decree. The QDRO gives legal permission to the plan sponsor to disburse funds to the ex-spouse.

Also, you could be entitled to Social Security spousal or survivor benefits based on a former husband’s earnings record. To be eligible for such benefits, you must have been married for at least ten years and not be entitled to a higher benefit based on your own record.

To collect a spousal benefit based on an ex-spouse’s earnings record, you must be 62 and unmarried. To collect a survivor benefit on a late husband’s record, you need to be at least 60 (or 50 and disabled); your benefits could continue even if you remarry.

In the case of a spousal benefit, your ex does not need to know you’ve made a claim. He must be eligible for benefits (that is, 62 or older), though not necessarily claiming, before you can apply.

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Susan B. Garland
Contributing Editor, Kiplinger's Retirement Report
Susan Garland is the former editor of Kiplinger's Retirement Report, a personal finance publication whose subscribers are retirees and those approaching retirement. Before joining Kiplinger in 2006, Garland was a freelance writer whose work appeared in the New York Times, the Washington Post, BusinessWeek, Modern Maturity (now AARP The Magazine), Fortune Small Business and other publications. For 12 years, Garland was a Washington-based correspondent for BusinessWeek, covering the White House, national politics, social policy and legal affairs. Garland is a graduate of Colgate University.