Women in Retirement

I wanted to take a few moments and discuss a few issues that women face in retirement. 

Women generally live longer than men and most women (but not all) received lower wages than men over their working life.  These lower wages were be due to years of maternity leaves and raising children, as well as pay rates.  Living longer and receiving lower wages lead to what is called increased longevity risk.  Lower wages make it harder to save for retirement in general.  Both single and married women must think about this.   Why married women?  Men sometimes do not plan that their wife could live longer than them.  In certain scenarios, income can go away when the husband passes.  This can be related to Social Security income as well as pensions.  For the pension, even if you get to keep it, it may be reduced by half.  You wouldn’t want to deal with how to live on less income while you don’t have income coming in from an employer.  So, women need a plan in place to have financial security. I don’t know about you, but security is really important to me.  I’m assuming it is for you too.

First let’s discuss what longevity risk is and how it works.  Longevity risk is the risk that you will outlive your retirement funds.  Market risk is another risk that retirees face.  Market risk is simply the risk that you will lose a portion of your account balance during a market downturn, if your invested in the stock market.  In retirement, it is important not only to protect what you are able to save, but it is imperative that you make sure that those retirement funds will last your entire lifetime.  When people retire and start withdrawing funds from their retirement accounts, there is a percentage that is frequently used (around 4%) to determine how much will be drawn by the retiree yearly.  This is known as the 4% rule. 

Every few years, you will have to reassess for inflation and losses of portfolio balances due to market fluctuations.  For example, in year 1, if you have $400,00 in your retirement accounts, 4% would be $16,000.  If your portfolio was suddenly cut by 30-40% in the stock market in your retirement years, you don’t have as much time to recover from these loses. If in year 5, if your account balance lost $100,000 due to the market, then the percentage you are using to draw funds out will have to decrease or you will risk depleting the retirement funds.   Could you afford to do this?  If you didn’t decrease the draws, what would happen when you run out of money? People see what they believe is a large portfolio balance and think that is enough.  But the facts state that it isn’t always enough, and people’s retirement plans do fail. 

So how do you do to plan and take some longevity risk and market risk out of your scenario?  By adding a guaranteed income stream called an annuity.  An annuity will give you guaranteed amount to live on each month no matter what the market does.  Market downturns will no longer matter for the funds that you have placed in an annuity, because the annuity eliminates the worry of market volitivity and market risk for those funds.  Since you will receive these guaranteed income payments for the rest of your lifetime, you no longer worry about longevity risk as well.  You get participation in the market without the downside risks.

​My thoughts are that if you have money sitting in CD’s where you are drawing low interest (near 1%) or if you have a large 401k or IRA portfolio invested in bonds (because you are afraid of losing money in the stock market), then it would be a good idea to sit down and see if an annuity would be a good fit for you.  An annuity protects you from market downturns, protects your initial investment, and will have more gains than CD’s or bonds.