A New Approach to Retirement Income Planning for Women

I want to reinvent retirement income planning for women.

Women have a lot going against them — much more than men — when it comes to creating enough income to last through their retirement years. Set out below is a list of some of the impediments women must overcome, along with solutions that will provide a satisfying retirement.

Longevity: Women live longer than men. This simply means that women need more savings at retirement to provide the same amount of income as men throughout their lifetime. On average, a 70-year-old woman can expect to live more than two years longer than a man. That may not sound like a lot, but for an annual budget of $50,000 plus inflation, that could require another $100,000 or more in savings.

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Cost of Caregiving and Long-Term Care Insurance: A woman is more likely to live long enough to need expensive caregiving and long-term care services. Because they live longer and experience more years of costs for care, insurance companies typically charge premiums on long-term care insurance that are 50% more for a 70-year-old woman than for a man of the same age.

Lower Social Security Benefits: Women, on average, earn less than men during their earning years, both because of the work many do and lower pay rates for the same work. As a result, women generally receive less — by at least 15% — from Social Security. In addition, their lower earnings during their careers generally mean a lower 401(k) or IRA balance at retirement.

Less Experience Managing Investments, Advisers or Accountants: For traditional couples approaching retirement, the woman is also likely to have less experience managing investments, filing tax returns, and working with an investment adviser and accountant. That can mean that women clients might not have a complete set of questions to ask their retirement experts.

Higher Likelihood of Being a Surviving Spouse: For the spouse who lives longer, there are a lot of details to attend to and knowledge that’s needed. Many widows may have been less involved in the development of their financial plan for retirement. Or worse, there is no plan.

Bottom Line: Women may have to overcome a savings, income and experience gap. Women have to spend more of their savings to make up any shortfall in their secure sources of income vs. their budget. The result is a steadily shrinking nest egg from which to create income and a greater risk of having to skimp on their lifestyle to close the gap.

Consider Gender in Planning

What do consumers of either gender do when they need help figuring out retirement? They visit a financial adviser, either in person or through an online site. But most advisers (virtual or not) won’t be able to help their female clients address the problems I listed above.

Yes, their calculations may take into account a woman’s longer expected lifespan. However, the solution is often to tell the client to spend less money every year in order to make her savings last to a certain age — 90, for instance. In other words, under traditional asset allocation retirement planning methods, they recommend reducing the budget instead of building a better plan.

That isn’t a great solution. An alternative approach, called Income Allocation Planning, is a better way to help women convert their savings to produce lifetime income, keep taxes and investment fees as low as possible, afford the premiums on long-term care and generate more, safer income from a lower amount of savings.

Planning Designed for a Woman

Here are some of the key steps in this process.

Focus on Income and a Plan that Delivers Lifetime Income

All investors, but women in particular, should think of their retirement in terms of income. What’s the income you will need to cover basic expenses, including any health or LTC premiums? Where is that income going to come from? Dividends, interest, IRA withdrawals, Social Security and annuity payments? Is your plan dependent on realizing capital gains or liquidating securities from your personal savings?

Avoiding the last point may be critical. I tell the story of my own mother’s retirement plan in which she deposited three income checks each month: dividends on her investment portfolio, Social Security benefits and annuity payments — and didn’t worry about market gyrations.

Use Annuity Payments to Fill Part of Your Income Gap

The planning I recommend, based on Income Allocation, is gender specific, not based solely on age. It addresses longevity risk — the risk of outliving your savings — by adding annuity payments to the mix to ensure that more of your income will be deposited in your bank account every month no matter what the market does, or what your age. As you will see from this example from Jerry’s Retirement Ideas, a relatively easy shift in investments can result in a significant increase in spendable income.

Create a Specific Plan If Single or If You Are a Surviving Spouse

Income Allocation addresses your spending needs and goals whether you have always been responsible for building your own savings, you plan to enjoy a long retirement as a couple, or you find yourself on your own again. Whatever your situation, you can build an Income Allocation plan that will pay for premiums of long-term care insurance and other expenses.

Lower Your Fees and Build in Continuing Plan Management

An Income Allocation plan will feature lower fees than the typical asset allocation plan because of lower portfolio management fees that are also more transparent. (One suggestion: Ask your adviser to deduct fees from your income to see how large a bite the adviser is taking.) The fees in this type of plan are lower because you’ll move some of the money from your investment portfolio — which you pay ongoing management fees on — into an income annuity, which doesn’t have ongoing fees. However, you still have your adviser, so you can adjust strategies as the market does change, or when you need additional care at home — or you want to spend a little more money on a vacation or the grandchildren.

Minimize Income Taxes

Taxes can reduce your spendable income, too, but an Income Allocation plan minimizes the taxes you must pay so more income stays in your bank account. Actually, IRS rules favor women, as you can read about here. Payments from an income annuity purchased with personal savings receive a tax break because a portion of each annuity payment is considered a return of previously taxed principal, until the principal has been paid out. In one scenario, over 98% of the annuity payments are received tax-free during the first 15 years. Women live longer and thus benefit more: It means women can use some of their personal (after-tax) savings to buy annuity payments and benefit from their favorable tax treatment. Suddenly, gender is a plus, not a negative.

In conclusion

It’s about time that financial planning recognizes women have different needs than men and that those needs can be met for a satisfying retirement. If you are ready to create a retirement income plan designed specifically for you, contact me. We will discuss your situation and create strategies to achieve your financial goals.