Women and Retirement

I don’t know about Get Rich Slowly readers, but I can tell you that the majority of Motley Fool readers are guys, and that’s true of most financial publications.

That men are more likely to be consumers of investment information could explain the gender gap in financial literacy — especially among older Americans — that some studies have uncovered. I don’t mean to demean the better-smelling sex; in fact, some studies have found women deliver better investment returns than men do. But the deficit in financial literacy is especially troubling given the other challenges women face in retirement planning. Some of these challenges are faced by all women, while others pose particular problems for women who are or were married, especially if they put their careers on hold to raise a family.

The Troubling Statistics
Here are some stats to put it in perspective:

  • Women, on average, earn 76% of what men earn, resulting in an average lifetime earnings differential of $250,000.
  • Women leave the workforce for an average of 12 years to raise children or care for relatives, resulting in a loss of $550,000 in wages over their lifetimes.
  • The average woman lives five years longer than the average man. Sounds good, but it means women have to stretch their retirement savings longer.
  • Some of the biggest health-care costs are incurred in the year prior to death, which reduces financial resources left to surviving family members. Those survivors are most likely to be women, since wives tend to outlive their husbands.
  • Women of the baby boom generation are more likely to be divorced than women from other generations and to have fewer children to rely on in their old age.
  • A couple must have been married 10 years before an ex can claim spousal Social Security benefits. But most divorces occur within the first seven years.

In addition, here are some sobering facts from the Center for Retirement Research:

  • As employers drop defined-benefit plans (pensions) for defined-contribution plans (401(k)s), divorced women may suffer. According to the center’s director, Alicia Munnell, “Traditional pensions give wives an automatic claim on their spouse’s benefits, but 40l(k) plans usually do not.”
  • Despite being an average of three years younger than their spouses, wives usually retire when their husbands do. This can cut short their careers, savings, and retirement benefits.
  • Among single women 65 and older, 28.2% are considered poor or near poor, compared with 22.7% for non-married men and 8.1% for married people in the same age group.
  • A married couple’s combined Social Security benefit is reduced by one-third to one-half when one spouse dies. Also, payments received from a defined-benefit pension might be reduced or eliminated.

What’s a Woman to Do?
The solution for all women — single, married, widowed, or divorced — is to take control of their financial futures. It stands to reason that since women live longer, they should consider retiring later. Postponing retirement can mean a larger nest egg and Social Security benefits. Note that Social Security benefits are based on your highest 35 years of earnings. If you worked fewer than 35 years, those no- and low-earning years might be used to calculate your benefit. By working a few more years, you can increase your benefit. Also, non-working spouses can contribute to a spousal IRA, allowing for more tax-advantaged savings.

For married couples, both spouses should be involved in the day-to-day management of the finances. If one person handles the finances and the other doesn’t want to take over after he or she becomes widowed, assemble a list of trusted advisors who could assume those duties.

Remember that a married person can receive a Social Security benefit based on his or her work record or their spouse’s work record, whichever is greater. Because of their lower lifetime earnings, approximately two-thirds of wives receive benefits based on their husband’s record. But if the husband applies for Social Security benefits early — and thus receives a reduced monthly payment — the survivor benefit will also be lower.

For this reason, husbands should consider postponing the application for Social Security benefits as long as possible. The same principle generally applies to defined-benefit pensions, so be sure to consider the benefit to the surviving spouse when you’re deciding when to receive your pension and in what form.

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