4 Ways Women Should Plan for Retirement Differently
Retirement income planning for women needs to account for longer life expectancies and more expensive long-term care needs. Women also need different investment and estate planning strategies.
My wife and I don't take the same vitamins. We don't follow the same workout plan. We don't have the same diet. (The last one is on me. I should eat healthier food.) Think of retirement planning for women and men as a daily vitamin. They should be different by design.
This can apply to both accumulation for retirement and retirement income planning. For today's purposes, we are going to focus on retirement income planning, where our practice, Exit 59 Advisory (I'm the president), is focused.
Below are four areas where planning for women and men should vary and a few things you can do to prepare.
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Longevity planning
The obvious fact that women live longer than men is the first domino that falls and creates many of the less obvious dominos falling in its wake.
If you're going to live a longer life, lifetime income sources are more valuable. Receiving $10,000 per month is more valuable if you receive that amount for 30 years instead of 25. (Duh.) So, what can you do about it?
- Consider delaying claiming Social Security or, if you're married, having your spouse delay claiming. That 8% delayed retirement credit you get paid to wait becomes more valuable the longer you collect the benefit.
- Pension options should be considered in the context of a longer life expectancy: Pension formulas are typically based on unisex mortality tables, so your pension benefit does not change because you're a woman. This makes lump sums less valuable typically than lifetime income streams. And single life annuities, all else being equal, are more advisable than joint options that may make more sense for men.
- Consider other lifetime income sources: A private annuity will factor in the fact that you are a woman. However, if you're married, it may make sense to consider joint income annuities. If you just find comfort in knowing you'll have basic expenses covered for a long life, it's worth getting a quote from an insurance agent.
Asset allocation vs asset purpose
Because women live longer, they should have more of their assets in equities as a hedge. However, this increases sequence of returns risk — the risk that the market drops significantly as you start withdrawing.
It also requires riding an investment roller coaster that is twice as scary when you don't have a paycheck.
The concept of asset purpose is similar to a bucketing strategy in that it will allow you to take more risk with buckets of money that you won't need for a long time. You can carve out a portion of your assets for end-of-life and long-term care. Those funds can be aggressively invested, and likely the risk endured, because you probably won't need them for a longer number of years.
Things like travel funds, an expense that spikes early in retirement, would be more conservative. Expenses needed within two years in this strategy would be kept in cash to account for the possibility of a significant market downturn.
In the aggregate, you would end up with a higher equity allocation over time as you spend down the more conservative buckets early in retirement.
Long-term care
I always used to joke in the continuing education sessions I taught on this topic that men who go into a nursing home hate it and then die. Women go in, make friends and live forever. I was only sort of kidding.
Women are not only more likely to need long-term care, since they don't receive the reciprocal care from their husband who has already died, but they tend to need care for about twice as long as their male counterparts. Not fair, I know.
When we build out financial plans, the long-term care expense we stress-test is about twice as high for women as it is for men.
If you don't have a plan, or want to stress-test it yourself, you can access a free version of the planning software we use.
Estate planning that actually matters for you
It is notoriously difficult to get male clients to tackle estate planning. I suspect that's because it's something solely for the benefit of someone else.
If you are a married woman, you should feel more confident that you are doing estate planning for you — and if you don't, things are going to get messy.
I typically encourage our clients to review beneficiary designations annually and a written estate plan (wills, trusts, etc.) every five years or if something material has changed.
This will almost never feel like a priority until something bad has happened. It pays to spray for weeds before they take over your lawn. Trust me: I know.
I really am just scratching the surface on this topic and plan to come back to it in future columns.
Notably not mentioned is the impact of being a caregiver and the outsized impact and obligation this comes with for women.
In this context, it can take you away from your peak earning years. That impacts Social Security, pensions and investment accumulation, not to mention the reality that mental and physical strain can make it easy to take your eye off the ball (your own finances). The former is hard to prevent; the latter is also difficult, but preventable.
This all seems very unfair to women.
Here's the silver lining and forgive the generalization: Women are also better planners.
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