By: Anna Rappaport
Anna Rappaport is an internationally recognized actuary, consultant, author, and speaker. She focuses on on the impact of change on retirement systems, workforce issues, women’s security, disability and defined contribution plans, phased retirement, and improving the individual’s ability to plan.
Retirement planning is extremely important for women, and ideally it should consider the big picture including financial resources, the family’s situation, risks, and employment. Nevertheless, many women are more focused on meeting their families’ current needs than on their longer-term futures. This article looks at how family issues can shape women’s retirement plans and examines issues and planning steps that might otherwise be overlooked.
Women have different retirement concerns than men: Recent focus group studies by the Society of Actuaries examined men’s and women’s perspectives on retirement separately. Our research showed that women expressed much more concern about their retirement futures than did men, and they also reacted to the discussion quite differently. Men were more willing to wait for a problem to arise, rather than plan for it.
Longer life and longer disability: Women outlive men who are the same age by three to four years on average, and as a result, make up the majority of older Americans. And more of their longer life is expected to include some form of disability. Males age 65 are expected to spend 1.5 years with mild or moderate disability and 1.5 years more severely disabled. In contrast, women age 65 are expected to spend 3.0 years with mild or moderate disability and 2.8 years more severely disabled.
Planning horizons inadequate: Although women are expected to live longer, they tend to plan for about the same period of time as men. In fact, both groups often plan for too short a period, but the magnitude of the shortfall is greater for women. It is further compounded by the fact that women average lower pay and have fewer years in the labor force than men. This makes it harder to grow their pensions and Social Security benefits.
Family issues and retirement: When family members help each other out, this can be viewed as a form of informal risk-pooling. In times past there was much family support for the elderly, but today, older persons may have few family members able and willing to help out. Moreover, women often marry older men, or are divorced; as a result they may spend years alone. Also in the past, older family members needing help were invited to move in with children or other relatives. By contrast, the blended families of today are often less willing and able to take in their elders. For instance, children may be less willing to help step-parents, once their natural parents are gone.
Why people retire: When women retire, they are likely to be influenced in this decision by their spouses’ retirement, as well as caregiving needs of their spouses or other family members. Studies show that 44% of men and 60% of women approaching retirement anticipate that their spouses’ retirement decisions will affect the timing of their own retirements. If a woman retires early for family reasons, she should be careful to insure that there will be adequate resources for her future. In the majority of couples, it is the wife who lives longer and is more likely to run out of money in retirement.
Caregiving and retirement: Many women leave jobs or reduce their work schedules to care for children or older family members, whether parents or spouses. Unfortunately people tend to overlook the cost of caregiving on retirement security, as analyzed by a recent Society of Actuaries study. This analysis estimates that lifetime wealth can fall by $303,800 for caregivers who drop out of the workforce. So when women devote themselves to caregiving for older family members, they must be careful to not sacrifice their own retirement security. Moreover, employers bear part of the burden too: nationally caregiving reduces productivity by an annual $25 billion.
Planning using averages is risky: Most retirement planning focuses on the average amount of money needed for success in retirement. In contrast, statistical modeling explores a distribution of outcomes. How much you need to be 95% sure of not running out of money is much higher than the amount you need to be 50% sure, largely due to the risks of shocks such as bad investment results, major long term care expenses, and unexpected health care expenses. While coping strategies such as working longer, reducing expenses, and phased retirement can help, these strategies may not provide enough to deal with major shocks.
For example, an American couple at age 62 having income and wealth at the 75th percentile has $105,000 of household income and an estimated $250,000 of nonhousing wealth. A recent Society of Actuaries report shows that they need $544,000 at retirement to give them a 50% chance of not running out. The same family would require $1million to have a 95% chance of having enough. If they purchased long term care insurance covering both spouses, the $544,000 goes up to $599,000 reflecting the cost of Insurance, but the $1 million falls to $851,000. The insurance benefits are a big help to those with a major claim. If they bought long term care insurance on the wife only, the numbers are $581,000 and $871,000, respectively. Planning for the 50% safety level unfortunately means that families will fall short half the time. (More on these calculations may be seen in my recent study available here.)
Here are some tips for women to better address these issues:
These suggestions go beyond very basic advice related to saving earlier, saving more, investing well, and being very careful about Social Security claiming strategy. Those are essential for building a good retirement foundation.
- Participate with your partner in employee benefit plan decisions and in elections when there are choices.
- Before leaving a job for caregiving, or assuming the role of major caregiver, it is important to evaluate the decision’s long-term financial and personal impacts for the individual taking this step.
- Think about the retirement security issues that apply when making decisions about leaving or taking a job, and about getting married or getting divorced. Pay particular attention to retirement issues at the time of divorce.
- Build a retirement plan that works not only for a couple, but also for both individuals if they are not together. They should plan for the remaining life of the longer-lived member of the couple.
- Consider risks and shocks including the need for long term care, disability, major health expenses and investment risk in planning.
- Be very careful before withdrawing retirement funds (or forgoing retirement savings) to help family members in need.
- Build a support network, including family, friends, and appropriate professional help. Don’t be afraid to ask for help when it is needed.
This piece was originally posted on April 8, 2015 on the Pension Research Council’s curated Forbes blog. To view the original posting, click here.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.