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How Women Can Combat Their Greatest Retirement Risk

Feb 14, 2020 4 min read Rebecca Lake

Key Takeaways

  • Living longer can increase the risk of a woman's outliving her savings.
  • Planning for longevity risk means accounting for competing financial goals and specific financial threats.
  • Shaping your plan early and utilizing the right tools are essential.

 

Retiring comfortably is a desire that's shared by men and women alike, but their pursuit of that goal may appear very different. For women, achieving a secure retirement means preparing for one very real threat: outliving their savings.

Researchers at the London Business School suggest that more than half of millennials today could live to age 100.1 Statistically, after turning age 65, women have an average life expectancy that's two and half years longer than men.2

 

 

While living longer may mean more time to travel or pursue leisure activities in retirement, it also requires women to rethink their savings strategy to help ensure their money will last. Creating a strategy that acknowledges and minimizes longevity risk is critical to avoiding a financial shortfall.


1. Prioritize your financial needs

Managing longevity risk begins with understanding what your retirement needs are and what obstacles may exist that make saving for those needs more difficult.

For example, stepping away from your career to care for children impacts your ability to save for the future. According to a Salary.com survey, the duties performed by stay-at-home moms are worth an annual salary of just over $143,000.3

While you may not contribute financially to the household, your role is a highly valued one and you should treat it as such from a savings perspective. Your spouse can contribute to a spousal IRA on your behalf during your non-working years. If and when you return to the workforce, you can continue growing retirement wealth through an employer-sponsored plan or an IRA of your own.

Adequate life insurance coverage is another essential tool for couples when outliving your spouse is a possibility. The proceeds from a life insurance policy could supplement income from retirement accounts, including those you own and any you inherit from your spouse. You should also consider life insurance for yourself, in the event you're not the spouse who lives longer. The amount of life insurance each of you needs to have in place in order to adequately protect your family may surprise you.

Caregiving duties — either for an aging parent or a spouse — can put a wrinkle in your savings plans. According to Caregiver.org, 75% of all caregivers are women.4 Acting as a caregiver can make saving consistently more difficult if you're working fewer hours or taking a temporary leave of absence.

In this scenario, you'd likely need to adjust your budget to account for a reduced income. Saving should still be part of your budget, however. If you're working, you can lower your contributions to your employer's plan or an IRA, but you shouldn't discontinue them altogether. Even small contributions allow you to take advantage of the power of compound interest over time.

Saving for college is yet another conflicting goal to contend with. You may not want your children to leave school thousands of dollars in debt, but your own financial situation should take precedence. Think of it this way: In a plane crash, you're told to put on your oxygen mask first, then help your children. The same principle applies when it comes to retirement.

As you plan for longevity, keep the focus on your needs. Review how much you have in retirement savings, either in an employer's plan or an IRA. Add in your other assets, including taxable brokerage accounts and liquid savings. Then, compare the total number to your ideal retirement savings target.

  • How wide is the gap?
  • How much will you need to add to your savings monthly or yearly to reach your goal, based on your age now and the age at which you plan to retire?
  • How could staying at home to raise children, acting as a caregiver, or paying for college compromise your ability to save?

Answering these questions can help you make adjustments to your plans and downplay longevity risk.

 

2. Think about your long-term health

A longer life expectancy can increase the odds of needing long-term care at some point. If you're married, it's also possible that your spouse could require long-term care. The average cost of care in a semi-private room was $225 per day in 2016, according to the U.S. Department of Health and Human Services.5 Assuming a 2.5 year stay, long-term care could add over $205,000 to your retirement costs.

Medicare doesn't pay for long-term care. Medicaid does, but you're required to spend down your assets to qualify. Long-term care insurance could help cover the cost without draining your savings, but there's a risk of paying for coverage that you may never use.

Again, this is where life insurance can be of benefit. Permanent life insurance policies allow you to build cash value that can accumulates interest, generally tax-free, over time. You could then borrow any accumulated cash value in retirement to help pay for health needs, preserving your other retirement assets.6

An annuity is another way to help fill the gap. Annuities offer tax-deferred growth opportunities and guaranteed lifetime income that could supplement some of the medical expenses in retirement. And, if you stay healthy, the annuity would continue generating retirement income for other expenses.

Disability should also be factored into your plan. According to the Bureau of Labor Statistics, women are more likely than men to be disabled.7 Disability insurance could be invaluable for covering expenses in the short term, or providing income over the long term, if you become disabled — whether physically or mentally — and can't work.



3. Don't assume Social Security is enough

Social Security can play an important role in your retirement plan. And when and how you claim your benefits directly impacts your bottom line.

Normal retirement age ranges from 65 to 67, based on your birth year. Delaying these benefits, however, is something to consider when longevity risk is an issue. For each year you delay benefits past your normal retirement age up until age 70, your benefits increase by eight percent.8

Social Security is only part of the picture, however. Women also need to proactively invest for growth and, eventually, income. Fortunately, they're equipped to do so. According to Capital Group, 44% of women take a thoughtful, long-term approach to investing and risk, and 52% of women are confident in their ability to make good investment decisions.9

Leveraging that confidence and approach to risk is crucial for building a portfolio that's built for longevity. Understanding your tolerance for risk and your risk capacity — meaning how much risk you may need to take on to meet your objectives — can help you create an asset allocation that's suited to your age, time frame for investing, and overall goals.


4. Start planning now

Once you have a better idea of your future needs — dreams, constraints, desires — then it's time to get going. Perhaps the most important thing women can do when it comes to succeeding in retirement is to focus on it as early as possible.

When you're just launching your career in your 20s and 30s, you may feel as if you have decades to plan, because you do. Or, if you've let some time slip by, it's not too late to make a positive difference in your retirement outlook in your 40s, 50s, and beyond.

Throughout their working lives, women become adept at juggling the competing priorities of work and family commitments. Across a career and a lifetime, the choices you make — based on the specific responsibilities you face — will affect your ability to retire well.

The best way to manage longevity risk is to plan for it early and often. The sooner you begin giving serious thought to how much money you'll need to retire, what challenges may keep you from reaching your goal, and how you can counter those challenges, the brighter your retirement future may be.

 

 

Rebecca Lake has been covering finance, investing, and small business for nearly a decade. Her work has appeared online at U.S. News & World Report, MSN Money, Business Insider, and Investopedia.

 

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