Karen Williams feared she would never be able to retire. Had it not been for the $21,000 buyout she received from Michigan’s Wayne County Regional Educational Service Agency earlier this year, Karen, who is 60, would still be working. She has been saving for retirement for the last 14 years. Before that, she worked at a local YWCA but left after nine and a half years due to illness, not realizing that she needed to work for 10 years in order to be vested in her company’s retirement plan.
The $21,000 she received this year is the bulk of what Karen has to survive on. She receives a pension payment of $3,150 each month before taxes, but because it is tied to Social Security, the amount she receives will decrease once she reaches age 65. Since she lost a significant amount of money from her 403(b) plan and through an investment club during the recent market downturn, Karen is wary about investing. Afraid of losing her money, she has her windfall in a simple savings account. She hopes that there might be a way to invest so that the money will serve her better over the long term.
Until recently, Karen had $22,000 in debt after completing her Ph.D. from Wayne State University, as well as other expenses after she got divorced 25 years ago. Her son helped her set up a consulting business, and she used the money from this second job to pay down her debt. “I have concerns,” says Karen, “not so much about the next year or two, but beyond that, especially if I stay on this fixed income, which is substantially less than I was making.”
MAINTAIN CASH FLOW
“Most retired women’s primary concern is cash flow,” says Cheryl Creuzot, president and CEO of Wealth Development Strategies L.P., a financial management and planning firm. “They need to ensure that they don’t outlive their income.” According to the Women’s Institute for a Secure Retirement, single, older women, including widows, receive more than half of their income from their Social Security benefits. In fact, Social Security is the only source of income for 40% of African American senior citizens. Most financial advisors say that retirees need about 70% of their pre-retirement earnings to comfortably maintain their standard of living. Social Security will replace about 40% for those with average earnings, which means that almost everyone will need supplemental forms of income such as a pension, savings, or other investments.
The first goal is to reduce expenses. Karen did so by setting up her consulting business, which allowed her to eliminate debt. Creuzot says Karen should continue working in order to save more to supplement her retirement income, especially since her health is a concern and she
does not know how much longer she will be able to work. Women should never retire simply because they reach retirement age. They should first calculate how much they should receive from Social Security, then be prepared to work until they have enough put away to retire in the style they wish. For more information on Social Security, log on to www.ssa.gov.Financial advisor Kathleen Williams says women should put money into
savings plans that offer a tax break such as a 401(k) or an IRA. Women over 50 can contribute “catch-up” amounts to each. For 2003, an additional $2,000 can be contributed to 401(k) plans, and an additional $500 may be contributed to IRAs.In terms of asset allocation, Creuzot says, “Retired women need to structure a portfolio that allows them to replace their earned income and, at the same time, provides some growth because they could live another 20 to 30 years.” She recommends an asset allocation of income with moderate growth. The focus is on safer investments, such as low-risk bonds, but 40% of the portfolio is invested in stocks, which offers the best potential for fighting inflation over the long term. This is a conservative strategy that provides a lower overall rate of return in exchange for increased stability. It is most suitable for retired women, as they need to continue generating income yet also need capital appreciation to counter their loss of purchasing power.
Kathleen suggests that Karen invest 10% of her pension as well as $16,000 of her $21,000 into this new portfolio mix. The remaining $5,000 should be used to establish an emergency fund. “The goal is to grow that money as much as possible between now and age 65, at which time her income level will go down,” says Kathleen. “If she can eventually accumulate another $50,000 to $60,000, she will have $325 in additional income each month over [many] years.”
Another option available to increase retired women’s cash flow is a reverse mortgage—a loan against your home that you do not have to pay back until you die, sell your home, or move out. This allows for either a lump-sum or a monthly withdrawal. To be eligible for most reverse mortgages, you must own your home and be at least 62 years old. There is no minimum income required to qualify, and you do not have to make monthly repayments.
PRESERVE YOUR ASSETS
“Assuming that women get past the first concern and don’t consume all their money, the next question is how to preserve it,” says Creuzot. All retired people should consider a long-term care policy to ensure that their funds are not eroded by unforeseen medical expenses, such as living in a nursing home. Women should also have enough life insurance to pay off their debts after death and to leave an ample sum for survivors. Older women who have had previous illnesses and find it more difficult to purchase life insurance should look into getting guarantee-issue insurance (which requires no health exam) for as much coverage as they can afford.
Estate planning is key for a retired woman. Needless to say, Karen should have a will. Kathleen suggests setting up a Transfer on Death (TOD) on mutual funds that will allow the money to be transferred to a beneficiary. Retired women should also look into a durable power of attorney and a medical power of attorney, which will allow someone to make decisions on their behalf. In addition, if a woman is widowed and has an estate worth at least $1 million, she should ensure that she has enough to pay the federal estate tax that would have been deferred until her death.
Experts urge women to seek the counsel of attorneys, as well as financial planners, who can help grow their estate’s value and protect it from taxes and inflation. Many women are less likely to seek advice, often because they do not think they have accumulated enough wealth to make it worthwhile. “Never think that your portfolio is too small to seek financial advice from a professional,” says Kathleen. “You have to be careful with these assets that you’ve spent a lifetime accumulating.”
WHAT YOU SHOULD KNOW
1. It’s essential to start preparing for retirement the moment you begin working. You don’t want to be caught 15 years after retirement with little or no nest egg. Consult a financial advisor to figure out how much you’ll need to retire comfortably, especially since Social Security will only replace about 40% of your average earnings.
2. Restructure your portfolio so that it allows you to replace earned income and provides steady growth. Focus on safer investments such as low-risk bonds with 40% invested in stocks to fight inflation over the long term.
3. Women over age 50 can contribute catch-up amounts of an additional $2,000 for a 401(k) and an additional $500 may be contributed to an IRA for 2003. Another way to increase income is to reduce expenses so that you can retire in style.
4. Estate planning is key for retirees. Consider setting up a durable power of attorney and a medical power of attorney to allow someone to make decisions on your behalf.