Women and Retirement: Building a Solid Foundation
Delivered courtesy of Stephen Cunha, CFP, C(k)P, CLU, CLTC
These days, saving enough money for a comfortable retirement can be a challenge for most Americans, and the evidence suggests it’s most challenging for women. According to the MetLife Study of Women, Retirement, and the Extra-Long Life, women in the United States live eight percent longer than men on average, and while these bonus years may be a blessing, it also means than a woman’s resources must be designed to last longer.
This is especially true when one considers that because of shorter careers and possibly lower incomes, a significant proportion of women currently do not receive enough in Social Security benefits to meet even their basic needs. According to the Social Security Administration, the average annual Social Security income received by women 65 years and older was just $11,794 in 2010, as opposed to $15,231 for men. Moreover, married women often do not realize that the retirement benefits accrued by their husbands may be reduced if they are widowed or divorced. These combined factors put many women at high risk for poverty as they age, especially if they do not prepare accordingly.
Clearly, most women will need to build their own retirement savings to maintain a reasonable standard of living in their later years. Here are some strategies to get started:
- If your current employer does not offer a good retirement plan, consider your options for securing better benefits. While companies with defined benefit plans that replace a percentage of income (based on your salary and years of service) are becoming increasingly rare, make sure you work at a firm that at least matches contributions to a 401(k) or other defined contribution plan. If you are employed by a company with a traditional pension plan, find out what your benefit is likely to be and at what age you can collect the maximum benefit.
- Take advantage of the tax benefits of qualified retirement plans and traditional Individual Retirement Accounts (IRAs). Depending on your financial situation, you may find that making pre-tax contributions to a retirement account will not significantly reduce your net discretionary income. Contributions may decrease your current taxable income (and, consequently, your ultimate tax bill), and earnings are tax deferred. Taxes will be due when you begin taking distributions. If you withdraw money prior to age 59½ a 10% federal tax penalty will be due, in addition to income taxes.
- Consider the role a Roth IRA or annuity may play in your long-term plan. Contributions to Roth IRAs must be made with after tax dollars, but earnings grow tax deferred. Qualified distributions made after age 59½ are tax free, provided the account has been owned for five years. Certain income limits apply. Annuities allow you to save money on a tax-deferred basis and offer you a variety of options for managing assets and receiving retirement income. All guarantees of income are dependent on the claims-paying ability of the issuer.
- Plan to work longer. A few extra years spent working may enable you to save more money toward your retirement, and you may also consider working until you qualify for full Social Security benefits. In addition, your health care costs may be lower if you postpone retiring until you qualify for full Medicare benefits.
- If you’re married, assess the capacity of your partner’s retirement benefits to meet your future needs. Given the possibilities of divorce and widowhood, it’s essential you plan for a time when you might have to manage independently. Also, know your rights regarding your spouse’s pension in case of death or divorce and research the effects of divorce and remarriage on your Social Security benefits.
- If your family budget is tight, evaluate the benefits of putting extra funds into your own IRA or 401(k) versus putting money aside for your children’s college education. While your children may qualify for financial aid or low-interest loans to help pay for college, there are no grants or scholarships for retirement. Also, bear in mind that some funds may be withdrawn from a retirement account before the age of 59½ penalty-free, if used for qualified education expenses.
Taking the time to make saving for your own financial future a priority can certainly pay off handsomely in the end, and for most people, it is financially possible, even with other financial obligations, such as bills, the needs of children and other family members. While taking care of others is important, don’t forget to take care of yourself by preparing for your retirement—it can make all the difference in the long run, when you truly want your Golden Years to be golden.
Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor.
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