A Retirement Income Roadmap for Women

More women are working and taking charge of their own retirement planning than ever before. What does retirement mean to you? Do you dream of traveling? Pursuing a hobby? Volunteering your time, or starting a new career or business? Simply enjoying more time with your grandchildren? Whatever your goal, you’ll need a retirement income plan that’s designed to support the retirement lifestyle that you envision, and minimize the risk that you’ll outlive your savings.

When will you retire?

Establishing a target age is important, because when

you retire will significantly affect how much you need

to save. For example, if you retire early at age 55 as

opposed to waiting until age 67, you’ll shorten the

time you have to accumulate funds by 12 years, and

you’ll increase the number of years that you’ll be living

off of your retirement savings. Also consider:

• The longer you delay retirement, the longer you

can build up tax-deferred funds in your IRAs and

employer-sponsored plans like 401(k)s, or accrue

benefits in a traditional pension plan if you’re lucky

enough to be covered by one.

• Medicare generally doesn’t start until you’re 65.

Does your employer provide post-retirement

medical benefits? Are you eligible for the coverage

if you retire early? Do you have health insurance

coverage through your spouse’s employer? If not,

you may have to look into COBRA or a private

individual policy–which could be expensive.

• You can begin receiving your Social Security

retirement benefit as early as age 62. However,

your benefit may be 25% to 30% less than if you

waited until full retirement age. Conversely, if you

delay retirement past full retirement age, you may

be able to increase your Social Security retirement

benefit.

• If you work part-time during retirement, you’ll be

earning money and relying less on your retirement

savings, leaving more of your savings to potentially

grow for the future (and you may also have access

to affordable health care).

If you’re married, and you and your spouse are

both employed and nearing retirement age, think

about staggering your retirements. If one spouse is

earning significantly more than the other, then it

usually makes sense for that spouse to continue to

work in order to maximize current income and

ease the financial transition into retirement.

How long will retirement last?

We all hope to live to an old age, but a longer life

means that you’ll have even more years of retirement

to fund. The problem is particularly acute for women,

who generally live longer than men. To guard against

the risk of outliving your savings, you’ll need to

estimate your life expectancy. You can use

government statistics, life insurance tables, or life

expectancy calculators to get a reasonable estimate

of how long you’ll live. Experts base these estimates

on your age, gender, race, health, lifestyle,

occupation, and family history. But remember, these

are just estimates. There’s no way to predict how long

you’ll actually live, but with life expectancies on the

rise, it’s probably best to assume you’ll live longer

than you expect.

Project your retirement expenses

Once you know when your retirement will likely start,

how long it may last, and the type of retirement

lifestyle you want, it’s time to estimate the amount of

money you’ll need to make it all happen. One of the

biggest retirement planning mistakes you can make is

to underestimate the amount you’ll need to save by

the time you retire. It’s often repeated that you’ll need

70% to 80% of your pre-retirement income after you

retire. However, the problem with this approach is that

it doesn’t account for your specific situation.

Focus on your actual expenses today and think about

whether they’ll stay the same, increase, decrease, or

even disappear by the time you retire. While some

expenses may disappear, like a mortgage or costs for

commuting to and from work, other expenses, such

as health care and insurance, may increase as you

age. If travel or hobby activities are going to be part of

your retirement, be sure to factor in these costs as

well. And don’t forget to take into account the

potential impact of inflation and taxes.

Identify your sources of income

Once you have an idea of your retirement income

needs, your next step is to assess how prepared you

(or you and your spouse) are to meet those needs. In

other words, what sources of retirement income will

be available to you? Your employer may offer a

traditional pension that will pay you monthly benefits.

In addition, you can likely count on Social Security to

provide a portion of your retirement income. Other

sources of retirement income may include a 401(k) or

other retirement plan, IRAs, annuities, and other

investments. The amount of income you receive from

those sources will depend on the amount you invest,

the rate of investment return, and other factors.

Finally, if you plan to work during retirement, your

earnings will be another source of income.

When you compare your projected expenses to your

anticipated sources of retirement income, you may

find that you won’t have enough income to meet your

needs and goals. Closing this difference, or “gap,” is

an important part of your retirement income plan. In

general, if you face a shortfall, you’ll have five options:

save more now, delay retirement or work during

retirement, try to increase the earnings on your

retirement assets, find new sources of retirement

income, or plan to spend less during retirement.

Transitioning into retirement

Even after that special day comes, you’ll still have

work to do. You’ll need to carefully manage your

assets so that your retirement savings will last as long

as you need them to.

• Review your portfolio regularly. Traditional wisdom

holds that retirees should value the safety of their

principal above all else. For this reason, some

people shift their investment portfolio to fixed

income investments, such as bonds and money

market accounts, as they enter retirement. The

problem with this approach is that you’ll effectively

lose purchasing power if the return on your

investments doesn’t keep up with inflation. While it

generally makes sense for your portfolio to

become progressively more conservative as you

grow older, it may be wise to consider maintaining

at least a portion in growth investments.
* Spend wisely. You want to be careful not to spend

too much too soon. This can be a great temptation,

particularly early in retirement. A good guideline is

to make sure your annual withdrawal rate isn’t

greater than 4% to 6% of your portfolio. (The

appropriate percentage for you will depend on a

number of factors, including the length of your

payout period and your portfolio’s asset allocation.)

Remember that if you whittle away your principal

too quickly, you may not be able to earn enough

on the remaining principal to carry you through the

later years.

• Understand your retirement plan distribution

options. Most pension plans pay benefits in the

form of an annuity. If you’re married, you generally

must choose between a higher retirement benefit

that ends when your spouse dies, or a smaller

benefit that continues in whole or in part to the

surviving spouse. A financial professional can help

you with this difficult, but important, decision.

• Consider which assets to use first. For many

retirees, the answer is simple in theory: withdraw

money from taxable accounts first, then

tax-deferred accounts, and lastly, tax-free

accounts. By using your tax-favored accounts last

and avoiding taxes as long as possible, you’ll keep

more of your retirement dollars working for you.

However, this approach isn’t right for everyone.

And don’t forget to plan for required distributions.

You must generally begin taking minimum

distributions from employer retirement plans and

traditional IRAs when you reach age 70½, whether

you need them or not. Plan to spend these dollars

first in retirement.

• Consider purchasing an immediate annuity.

Annuities are able to offer something unique–a

guaranteed income stream for the rest of your life

or for the combined lives of you and your spouse

(although that guarantee is subject to the

claims-paying ability and financial strength of the

issuer). The obvious advantage in the context of

retirement income planning is that you can use an

annuity to lock in a predictable annual income

stream, not subject to investment risk, that you

can’t outlive.

Unfortunately, there’s no one-size-fits-all when it

comes to retirement income planning. A financial

professional can review your circumstances, help you

sort through your options, and help develop a plan

that’s right for you.