Here are the facts: Women are living longer than men[i] and nearly 50% of all marriages are likely to end in divorce (with even higher rates of “Gray Divorce,” or divorces amongst those over age 50). What does this mean for women? That at some point in their lives, whether through divorce, widowhood, or personal choice, the responsibility of financial management will land squarely on their shoulders.
Women have made impressive strides over the past few generations with more than half of American women acting as the primary breadwinner in their household. Today, women are working and earning more than ever before.
But when it comes to money matters, a striking number of women statistically still leave the responsibility of financial management up to men. Experts attribute this trend to a lack of confidence in financial decision making, the female focus on caregiving and homemaking, and even just traditional, societal norms; but regardless of this tendency, longer life expectancies and higher divorce rates indicate that women should empower themselves to take control of their financial futures sooner rather than later.
The main problem, however, is that many women are unsure of where to begin. In fact, over 40% of women say that a lack of knowledge regarding their financial affairs is the single largest deterrent to becoming more involved in money management.[ii]
With this in mind, we have formatted this article into two installments to help women overcome their financial challenges and take control of their future.
- Building a Healthy Retirement Nest Egg
- Maximizing Social Security Benefits
- Insuring Against the Unexpected
- Facing Financial Hardships such as Divorce or Widowhood
Building a Healthy Retirement Nest Egg
In a world where women are outliving men and divorce and widowhood are on the rise, retirement planning is more critical than ever. Deferring or ignoring long-term financial planning can put women at significant risk, especially if they have never taken charge of their own finances. Inevitably, women who plan for their future financial security will be better prepared to care for themselves should they find themselves alone later in life.
The first step will be to estimate your retirement income needs. And with today’s retirements lasting twenty and thirty years or more, women will need to accumulate more resources to cover the extended non-working period. Your individual retirement goals and available resources will ultimately determine how much you need to save. You’ll also want to consider that some of your living expenses will increase in retirement (healthcare, for example) and some will decrease (you will no longer be making monthly retirement contributions), but a financial planning rule of thumb is to estimate that you will need at least 70-80% of the income you are earning at the end of your career to maintain your lifestyle.
Once you’ve estimated the income you require, you’ll need to put a plan in action to reach those savings goals. Investing promises the highest rate of success when building a retirement nest egg, especially for women who have left the workforce at different junctures in their career to act as caretakers for either their children or aging parents. These women have had fewer working years to (a) contribute to retirement savings and (b) bolster their social security benefit amount, and as a result, may need to take more aggressive investing approaches to catch up. The right investments can considerably accelerate a retirement savings.
But which investment and savings methods will be best to build your retirement nest egg? The two factors that most greatly inform this answer are:
(1) Your Time Horizon: How long do you have to save before your projected retirement date?
(2) Your Risk Tolerance Level: Ultimately, your time horizon will inform how much calculated risk you should expose your investments to. In general, younger investors with a longer time horizon are able to tolerate more risk as their investments have more time to recover from loss should the market turn south. The closer you near to retirement, the more conservative your investment choices should be as you will have little to no time to recover from lost income.
It’s never too late to start saving for retirement, but due to compound interest, the sooner you begin, the better. Compounding can have such a profound impact on your investments that Albert Einstein called it, “the eighth wonder of the world.” He is cited as saying, “He who understands it, earns it; he who doesn’t, pays it.” At the fundamental level, the longer you have your money in investments, the exponentially higher rate of return you will receive. Why? Because your start earning interest on your interest. Someone who starts saving earlier can essentially save less but end up with more due to the power of compounding.
Maximizing Social Security Benefits
Social security benefits provide a form of income replacement in retirement. The amount of your social security payments is based upon your earnings history, when you decide to take benefits, and your amount of provisional income. With this in mind, there are a few steps you can take to maximize your benefit:
- Maximize Earning Potential in Your Working Years: Since social security benefits are based on the thirty-five years in which you earn the most income, it would behoove you to try your best to log thirty-five working years for the sake of your benefit amount. For any number of years under thirty-five where you aren’t earning an income, $0 in income will be factored into your calculation, significantly lessening your social security benefit potential. For women who take time off from work to raise children or help care for aging parents, logging this thirty-five years can present a bit of a challenge; but even income from side jobs can be factored into your benefit amount, so showing some form of income will be better than showing none. Online businesses and part-time consulting jobs are great ways to be able to earn an income from home while still fulfilling familial responsibilities.
- Work Until Your Full Retirement Age or Delay Benefits: Individuals eligible for Social Security can begin accepting benefits as early as age 62, but at a penalized rate which reduces benefits by 6.66% a year for the first three years and 5% for each additional year after that. In order to receive the full benefit amount, an individual must wait until they reach Full Retirement Age (FRA) to begin requesting benefits. For many years, the FRA was universally 65, but beginning with those born in 1938 or later, the FRA gradually increases up to age 67. A third option, though, is to delay benefits until age 70 in order to earn an 8% delayed retirement credit.
When it comes to maximizing benefits, the obvious answer might at first seem to be to delay in order to receive the increased amount. However, you must also consider the cost of delaying your benefits—the forfeited benefits not received while waiting. Michael Kitces sums it up well in his 2016 report, The New World of Social Security Planning, “For delaying Social Security to be a good deal, the recipient must outlive the ‘breakeven period’ over which the higher inflation-adjusting Social Security payments recover the foregone benefits not received up front (and after adjusting for the growth rates and the time value of money).” Essentially, the longer you live, the more beneficial it will be to delay benefits. So if you are in poor health, delaying may not be the wise choice since you may not recover the foregone cost associated with postponement.
- Decrease Your Taxable Retirement Income: For most retirees, social security benefits and work-sponsored retirement plans will not be enough to fully fund retirement. As such, many individuals will need to generate income from other sources. However, the rate at which your social security benefits are taxed is directly affected by how much provisional, taxable income you claim. Provisional income includes earned wages, interest, dividends, and any other taxable income you receive—taxable being the operative word.
Certain tax-sheltered savings vehicles such as Roth IRAs and Roth 401 (k)s offer tax-free retirement benefits. These tax-free benefits will not count against your provisional income amount for social security. As a result, generating more income from these sources (rather than from tax-deferred sources) may be able to reduce your taxable income, bump you into a lower threshold, and lessen the tax burden on your benefits.
The claiming decision can become even more complicated when considering spousal benefits in relation to widowhood or divorce, but we will discuss that Part II of this article when we address the financial implications of these life changes.
This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice.
Harbor West is a division of NorthEast Community Bank. Securities and Advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.
[ii] The Allianz Women, Money, and Power Study, 2006.