Retirement income planning for women 101

We all know we should be saving for retirement – but how much do you need to save? How do you predict your future income needs? This is especially hard for women since on average we earn and save less than men. Yet we also live longer. Retirement income planning for women is critical.

What will your retirement income look like? Social Security benefits, retirement account distributions, pennies from heaven? You can go crazy with the amount of retirement information out there. This post will focus on different sources of income in retirement. Specifically on retirement income planning for women.

You’ll consider how to maximize and when to tap your different retirement income sources. The goal is to increase your confidence in planning for your future.  No matter how big or small your retirement account balance is, you can take steps to secure your retirement income.

Four three retirement income sources

Financial planners used to talk about the “three-legged stool” of retirement income. The so-called legs were Social Security benefits, company pension income and personal savings.

These days you wouldn’t buy that old stool at a flea market. It’s no longer something you can sit on. But a new leg has emerged to help steady your retirement seat.

Pensions: gone

One of the stool’s legs has disappeared for most private sector employees. Companies who used to provide retiree pensions have switched to 401ks and other employee-funded retirement savings plans. In fact, only 15% of private sector employees have access to pension plans now. And most of them are unionized workers.

Social Security: wobbly

A second leg, Social Security, is rickety at best. The government keeps increasing Social Security’s “full retirement age.” But in many parts of the country, not even “full” Social Security benefits give you enough to meet basic living expenses. By the time our kids retire, the entire system may have gone bankrupt.

Personal savings: uneven

The third leg, personal retirement savings, varies widely from one person to the next. According to a 2018 study by Northwestern Mutual, the average amount Americans have saved for retirement is  $84, 821. This average is based on a survey of all adults, including both savers and non-savers. As it turns out, 21% of Americans have nothing saved for retirement. An additional 33% have saved less than $5000.

Work: a new leg on the retirement income stool

An increasingly important source of retirement income is paid work. Many people are working past the traditional retirement age of 65. We’re living longer and feeling better in old age than people did two decades ago.

All this longevity and health has a significant financial impact, though. Now you’ll need to support yourself for more years of retirement. Work is an important component of that support.

Leg #1: Social Security

Social Security: a system in trouble

When Congress started the Social Security system in 1935, average life expectancy was 61.  If people made it to retirement age, they would collect benefits for a few years at most. But by 2017, the average US lifespan was 78.7. Moreover, if you live to age 65 now, you’ll probably make it to 84 if you’re male, or 86.5 if you’re female.

People are collecting Social Security for 10, 20 or more years beyond what Congress had envisioned back in 1935. Even more challenging, our whole country is aging. In 1935 there were 37 workers for every 1 retiree. Today that ratio is 3 workers to 1 retiree, and it’s going to decline further.

When you stack up all the numbers, it’s hard to see how Social Security can avoid bankruptcy without a radical change in the coming years.

Social Security benefits aren’t enough

The average Social Security benefit in 2018 is $1404/month, or $16,848/year. If you logged Social Security’s maximum taxable earnings for 35 years or more, and you waited until age 70 to claim your benefits, your monthly benefit could be as high as $3698/month.

Social Security is a principal source of retirement income for much of the US population. The Social Security Administration estimates that 21% of married couples and 43% of singles in retirement rely on Social Security for 90% or more of their income.

Making the most of your Social Security income

Adjust your lifestyle

If Social Security benefits are your main source of retirement income, you’ll want to downsize your home and possessions. You can start that process now while you’re still working.

By adjusting your lifestyle to the level of income you expect to have in retirement, you’ll see how a lower level of income works for you. Then you can modify your retirement plans if need be. For example, you might decide to work for a few more years in order to bank extra savings before you retire.

Move overseas

Another strategy that is gaining in popularity among retirees who want to live well on a limited income is retirement abroad. Learn more about retiring overseas and whether it makes sense for you.

Wait until you’re 70 to enroll

You’ll maximize your benefits by waiting to claim Social Security until age 70. For example, while you can collect benefits at 62, FTA “Full Retirement Age” now stands at 67 for people born in 1960 or later. But you aren’t entitled to “full benefits” unless you wait until you’re 70 before you claim Social Security.

It makes sense to continue to work or take distributions from other investments until you reach age 70. If you can delay claiming Social Security, you’ll lock in a higher level of benefit payments for the rest of your life.

Study up

There are a few quirks in the Social Security system that might apply to you. For example, an interesting rule applies if you’re divorced, BUT your marriage lasted 10 years or more, AND you haven’t remarried.

In this case: if your personal Social Security benefits would be less than those of your ex-spouse, you can claim benefits based on your ex’s work record. Even if he remarried. Even if he hasn’t yet claimed Social Security benefits for himself.

Before you enroll in Social Security, it’s wise to learn about the current state of the law and what options you might have. The Social Security Administration provides counselors to help you enroll. But especially if you think a tricky situation might apply to you, do a little reading on the subject. Maybe even hire your own advisor.

One resource to help educate you on Social Security is Social Security: The Inside Story* by Andy Landis. Landis is a foremost authority on Social Security and Medicare, and he updates this book regularly.

Leg #2: Personal savings

Liquid Investments

When you think of saving for retirement, you often think of putting money aside in liquid investments. Principally accounts of different types that you can convert to cash as needed.

Pre-tax

Personal retirement savings include tax-deferred savings plans like 401k’s or 403b’s (similar but for non-profit institutions). They also include traditional or rollover IRAs (Individual Retirement Accounts). Self-employed people or small business owners can save for retirement with a SEP IRA (Simplified Employee Pension Individual Retirement Arrangement).

All these plans are funded with pre-tax dollars. But you have to pay ordinary income tax when you withdraw money from them down the road.

After-tax

There are also after-tax ways to save for retirement. For example, you can save after-tax dollars in a Roth-IRA account. The money grows tax-free. Meaning that you never have to pay additional tax on it, even when you withdraw money during retirement.

Brokerage accounts, CDs (Certificates of Deposit) and other savings vehicles account for the bulk of people’s remaining liquid retirement investments.

It’s complicated

Retirement income planning for women is complex. A married woman has to consider her own retirement savings accounts and life expectancy. Her plans also need to dovetail with her husband’s. They need to plan together in order to maximize their combined retirement income.

If you have after-tax savings or investment accounts, you may choose to tap them first. This can help you delay enrollment in Social Security until age 70 when you’ll attain the “full benefit.”

You’ll have to take RMDs (Required Minimum Distributions) from your pre-tax retirement plans starting at age 70.5. But be careful not to over-withdraw and bump up to a higher tax bracket.

Some experts advise you to put off withdrawing from a Roth-IRA as long as possible, so you let the funds continue to grow tax-free.

Retirement investment advice

When trying to minimize taxes and maximize income in retirement, it can be helpful to consult a financial planner.

But be sure to work with a planner who bills by the hour if possible – not one who earns commissions based on your investments. And/or choose one who is a “fiduciary,” meaning that she’s legally obligated to put her client’s interests first.

If you don’t work with a fiduciary investment advisor, you may receive merely “suitable” investment recommendations. Ones that could earn larger commissions for your planner, but not more money for you. This post gives an overview of women and retirement planning, and it discusses different types of financial advisors.

Real estate and other non-liquid investments

Our primary residence represents a big chunk of many people’s net worth. You may also own a vacation home, rental property, a business or another non-liquid asset.

There are lots of considerations involved in tapping the equity you’ve amassed in a non-liquid investment. Before you sell, assess the tax implications and other possible sources of retirement income. Make the timing work for you.

Downsizing the family home and/or moving to a lower-cost community can free up resources to help you enjoy a higher standard of living in retirement.

But there may be other ways to achieve the same goal. For example, you might rent out part or all your home. The rental income will help you pay down the mortgage while continuing to let equity build. This strategy can work well in high-growth real estate markets.

The overall advice here is to take your time and get creative. You may be able to come up with a solution that adds to your retirement income and maintains a stable net worth.

Leg #3: Paid work

Financial benefits of working longer

Working a little bit longer at your same job can give you higher retirement income in the form of Social Security benefits than years of additional saving will yield.

Delaying retirement

This counter-intuitive finding appears in a working paper called “The Power of Working Longer.” Published by the National Bureau of Economic Research, the paper was written by Stanford economist John Shoven and three of his former students.

It compares results of saving more versus working longer. The key finding is startling.  To realize the same impact on your future income as you get by delaying your retirement 3-6 months, you have to save an additional 1% of your earnings for 30 years.

Working longer doesn’t replace other time-tested retirement planning advice. You still should trim your investment costs, invest in employer-sponsored savings plans, and save as much as possible.

But working longer can be another component in maximizing your retirement income. It’s not just a way to earn more money now. Delaying your retirement can net you higher Social Security payments for years to come.

Semi-retirement

Whether you decide to increase future Social Security benefits by working longer at your present job, you still may choose at some point to supplement your retirement income with paid work.

You might want to work in a different capacity once you retire from full-time employment. You could use your accumulated knowledge and experience to do consulting. Or join the “gig economy.” Lots of retirees are driving part-time for Lyft or Uber. Or they’re taking other project-based jobs where they freelance from home, or wherever they are.

Part-time or “bridge” employment can give you the income to travel, buy a new car, or achieve some other goal. Plus, you might like it!

Health benefits

The benefits of working in retirement aren’t just monetary. Doing something you enjoy will give you energy and a sense of purpose. Also, working brings you into contact with other people. These social connections help maintain a positive mood and cognitive health.

A survey by economists at Cornell University and the Syracuse University measured the impact of working on people’s social networks. Researchers asked 1300 adults ages 56-85 about the size of their social networks in both 2005 and 2010. After controlling for marital status, etc., researchers found that continuing to work increases the size of your network of family and friends by 25%.

This contrasts with findings of social network shrinkage among people who stop working completely. Although the study doesn’t link working in retirement to specific health outcomes, it points to social benefits of work. Which other researchers have connected to improved mental and physical health outcomes among older adults.

Putting it all together

When it comes to retirement planning, everyone has to come up with the version that works for her. Retirement income planning for women has many variations. You may be married or single. You could be working for money. Or working as a volunteer, caregiver or something else you don’t get paid for.

Even if you’re years away from retiring, it’s important to review your finances periodically. Total up your expected retirement income from different sources:

• Social Security
• Pension (probably not a source you have!)
• Personal savings
• Paid work

Budget matters

You also should develop a budget. It will help you get a handle on your current expenses as well as predict what they’ll be once you retire. Check out this post for apps to help you plan and track your spending.

From there you can put together an estimated retirement budget. Compare this with the total amount you expect to earn from various retirement income sources. If your projected income covers your expenses, woohoo!

Present and future priorities

If your projected expenses exceed your retirement income, don’t despair. You still have time to determine how you’ll cut costs. And/or how you’ll increase your income by working longer or returning to work if you’ve taken a career break.

Perhaps the best aspect of forecasting your retirement income and expenses it that it makes you decide what really matters to you. Knowing what your retirement might look like can reduce anxiety about your future.

Planning for retirement might lead you to rearrange your priorities.  You might let go of things you used to think were necessary for happiness. In doing so, you’ll face retirement with greater confidence.

You may even find more joy in the present.

Images via: Shutterstock, Pexels, Openclipart

Links for further reading:

Retire Happy from the balance. This personal finance website offers advice on saving, budgeting, credit cards and living your best in retirement. In addition to comprehensive insights for every stage of one’s financial life. Tons of information here.

WISER (Women’s Institute for a Secure Retirement). This non-profit organization is dedicated to “improving the long-term financial security of all women through education and advocacy.” They offer loads of resources on their site, as well as links to other places you can learn about retirement planning. Plus, it’s totally focused on the needs of women.