Highlights From a Women’s Retirement Class

I recently attended a seminar about financial concerns facing women in retirement. Below are seven key take-aways that I gleaned from the presentation and accompanying materials:

 

Income Gap- This is the difference between an individual’s (or couple’s) total retirement income from various sources (e.g., pension, Social Security, annuities, dividends/capital gains, full- or part -time employment, self-employment) minus fixed (e.g., rent and car payments), variable (e.g., gas, food, and gifts), and occasional (e.g., insurance premium) expenses.

 

Social Security Stats- About half of single women age 65+ rely on Social Security for 90% of their income, despite the fact that it was always meant to be “a base to build on.” The break-even age, when people get more in benefits by claiming at full retirement age (FRA) than by taking early benefits at age 62, is about 12 years (i.e., at around age 78 with an age 66 FRA).

 

Longevity Stats- Women typically live longer than men, with one in three living to age 95. After age 80, the ratio of widows to widowers is 5 to 1. Some women could be retired for more years than they worked (e.g., work from age 20 to 55 and retirement from age 56 to 95 or even 100). This speaks to the need to save throughout one’s career to create an adequate nest egg.

 

America’s 401(k) Experiment- 2023 is the 45^th anniversary of tax-deferred 401(k) retirement savings plans that workers fund with voluntary contributions from their pay. Baby Boomers were “guinea pigs” for the use of 401(k)s, often as a substitute for defined benefit pensions. We are just starting to see results from the first generation relying primarily on 401(k)s to retire.

 

Withdrawal Guidance- The widely touted “4% Rule” cannot be applied blindly to everyone. Withdrawals from invested assets to pay living expenses must consider a person’s risk tolerance level and age in retirement. Older women who retire in their 70s and 80s+ can withdraw more than 4% of invested assets while more conservative women in their 60s should withdraw less.

 

Portfolio Reliance Rate- This is the percentage of retirees’ spending that comes from invested assets. In other words, how much they rely on investments for living expenses after accounting for other income sources such as Social Security, annuities, and a pension. A simple formula to calculate Portfolio Reliance Rate is PRR= Expected Spending ÷ Income Gap. For example, with $60,000 of expected expenses and a $30,000 income gap between expenses and guaranteed income sources, the reliance rate is 50% (i.e., half of the money for expenses from investments).

 

Window of Opportunity- While women live longer than men, on average, and should plan on living longer than they think, as well as building inflation price adjustments into future plans, nobody has a crystal ball for how much time they actually have. Another reality is that not all of a woman’s retirement years may include good health and mobility. It is generally not wise to postpone important “bucket list” goals but, rather, to front-load them to do early in retirement.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Financial and Lifestyle Concerns of Retirees

I recently attended several programs geared for older adults and read several books about living in retirement. Below are some key takeaways:

Common Fears- Many surveys indicate that the #1 fear of retirees is running out of money during their lifetime. Other frequently cited fears are health care expenses, long-term care expenses (e.g., assisted living and/or skilled nursing care), steep stock market declines, death of a spouse and a subsequent loss of spousal income, the financial needs of adult children and grandchildren, and inflation.

Tax Concerns- Some retirees, especially those who were diligent savers during their working years, wind up in a higher tax bracket in retirement than they were in during their primary careers. Reasons include required minimum distributions (RMDs) from tax-deferred retirement savings accounts and fewer tax write-offs such as mortgage interest. Taxes are exacerbated when one spouse in a couple dies, and the survivor must file taxes as an individual. This may trigger tax on Social Security, Medicare IRMAA tax, and other income-based taxes.

Tax Diversification- Ideally, retirees should have assets in three different “buckets” that are taxed differently: taxable investment accounts, tax-free investments (e.g., Roth accounts and municipal bonds), and tax-deferred retirement savings accounts (e.g., traditional RIRAs and 401(k)s). Having just tax-deferred accounts that postpone taxes to the future can be an expensive “tax bomb” that explodes in later life.

Present Bias- A common error of younger retirees is thinking that their life will always look the way it does today (i.e., their health and ability to do things). Sixty-year olds have a difficult time, for example, picturing themselves in their 80s and 90s. This is understandable because nobody wants to picture themselves in decline or having physical limitations. Financial experts advise living for today but planning for tomorrow.

Hybrid Insurance Plans- Many people are hesitant to purchase long-term care insurance (LTCI) because it can be difficult to find, is expensive (especially after age 60), and they may not need it. This has led to the availability of life insurance with a chronic illness rider. If someone doesn’t use the LTCI benefit, the life insurance benefit goes to a named beneficiary. Some people use RMD withdrawals to pay for a LTCI policy.

Sobering Statistics- One program speaker noted that 43% of baby boomers may not be able to afford basic living expenses throughout the duration of their retirement. Women, especially, are at risk due to lower average lifetime earnings than men and more gaps in their work history due to caregiving. When people are forced to make financial decisions out of desperation, their options are limited.

Work in Retirement- To quote Joe Casey, author of Win the Retirement Game, “many people discover that their money is better prepared for retirement than they are.” Retirement used to be viewed as a period of withdrawal and decline. It is now viewed by many as a period of renewal, engagement, meaningful pursuits, and personal growth and often includes some form of paid or unpaid work. For some people, “kicking back” and relaxing is not enough. They want to do things that have meaning and purpose.

Physical Health- When people leave a full-time job, they are “time-rich” and have approximately 2,500 hours of free time (50 hours a week for work and commuting x 50 weeks). This provides an opportunity to prepare healthy meals, get needed health screening tests, and engage in regular physical activity. More than 2023 years ago, the poet Virgil noted that “the greatest wealth is health.”

Skill Repurposing- Many retirees gradually figure out how to replace things they got from work beyond a paycheck (e.g., social connections, creativity, sense of purpose). Retirement does not necessarily mean abandoning everything  you used to do- but, rather, repurposing contacts, skills, and experiences in new ways. “Identity bridging” is the process of carrying over some parts of pre-retirement life into retirement while disengaging from others. It is important to have a “growth mindset.

In summary, to enjoy your years in later life, take care of your mental, physical, and fiscal health. For more information about happiness and financial security in later life, read my book, Flipping a Switch.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Financial Implications of Working in Later Life

After declining in early years of the pandemic, the percentage of older adults in the labor force is increasing. An estimated 21.9% of Americans age 65+ were working in 2022. 

In 2019, the older worker cohort included nearly 15% of those in their 70s. Reasons for continued work include a need for additional income (inflation), boredom, social contact, structure, and a sense of purpose.

Working longer brings financial challenges and opportunities. Below are 13 financial planning  factors to consider:

1.    Higher Social Security Benefit- This can occur three ways: 1. higher benefits payable at older ages due to delayed retirement credits, 2. higher earnings often paid to older workers, and 3. replacing low earnings from workers’ teens and 20s with higher earnings in later life.

 

2.    Tax on Social Security Benefits- Those who work and claim benefits will trigger taxes with a combined income above $25,000 (individuals) or $32,000 (married couples filing jointly).

 

3.    Social Security Earnings Limit- Those who claim Social Security before full retirement age will have their benefits reduced $1 for every $2 they earn over $21,240 (2023 limit).

 

4.    Continued FICA Tax- Like all workers, employed older adults must pay Social Security/ Medicare tax. If earnings replace prior years in a 35-year benefit formula, benefits will rise.

 

5.    Still Working Exception- Older workers who stay put can postpone required minimum distributions (RMDs) on a current employer’s plan under the “still working exception” rules.

 

6.    Continued Savings- Older workers who stay put can continue to put money in employer savings plans, often with matching, while entrepreneurs can make deposits to SEP accounts.

 

7.    Work Expenses- Costs, such as gas for commuting, continue for older employees. Older self-employed workers will incur expenses for office supplies and tools of their trade.

 

8.    Income in Lieu of Savings- Earnings from work can postpone withdrawals from retirement savings (e.g., $40,000 of earnings is equivalent to withdrawing 4% of a $1 million nest egg).

 

9.    Tax Bracket Triggers- When earnings are added to a pension, Social Security, RMDs, and other taxable income, planning is needed to avoid a higher tax rate or Medicare premium.

 

10. Tax Withholding Accuracy- With multiple income sources, accurate withholding is a must via payroll deduction, quarterly payments, and the safe harbor rules for under withholding.

 

11. Medicare Premium Tax Write-Off- Self-employed people age 65+ who are enrolled in Medicare Part B and D can deduct their monthly premiums against business income.

 

12. Employer Benefits- Workers age 65+ at large companies can still be covered by group health insurance, thereby postponing Medicare premiums. Other benefits also continue.

 

13.  Tricky Rules- Employers may have rules that prevent older workers from collecting pension benefits or former workers from returning as freelancers until a break in service.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Money After 70: Financial Opportunities and Challenges-Part 2

As noted in last week's post, I am creating a new Money After 70 course for older adults. Below are 10 more changes, opportunities, and challenges for septuagenarians (people aged 70 to 79):

Lasts and ROLE Calculations- As people age, their time orientation changes. As I wrote in my book, Flipping a Switch, people start doing return on life expectancy (ROLE) calculations. In other words, “mental math” comparing how long things might last in relation to their age and life expectancy and whether certain expenses (e.g., an expensive dental crown) are “worth it.”

 

Spending Down- Another topic in Flipping a Switch is switching from a saver to a spender in later life. A difficult challenge for “super savers” is spending down accumulated wealth and seeing account balances decrease as withdrawals are made for taxes on RMDs and health care.

 

Increased Risk of Diminished Capacity- The risk of mild cognitive impairment (MCI) or dementia increases with age and accelerates rapidly in the mid-70s. By age 82, the chance of MCI or dementia is over 50%. Therefore, a thorough estate planning review is warranted.

 

Shortened Investment Time Horizon- There is a frequently cited “100-age formula” for the percentage of stocks in someone’s portfolio, as well as 110-age (higher risk tolerance) and 120-age (aggressive risk tolerance). With each one, stocks are half or less of 70+ year olds’ portfolio to reflect the fact that they don’t have much time for market “bounce backs” to replenish losses.

 

New Housing Considerations- Throughout their 70s as life events (e.g., health issues, income loss, widowhood) occur, some people may reconsider where they live and explore options such as a reverse mortgage, continuing care retirement community (CCRC), and living with family.

 

RMD Withdrawal Increases- As a taxpayer’s age increases, the percentage of their tax-deferred account balance that must be withdrawn increases. At age 73, the RMD divisor of 26.5 is 3.78% of an account balance and at age 79, it is 21.1 (4.74%). At ages 80, 90, and 100, the taxable account withdrawal percentages increase to 4.96%, 8.20%, and 15.63%, respectively.

 

Communication With Loved Ones- Many people put off conversations about “hard topics” (e.g., dying, feeding tubes, care-giving expectations, bequests in a will) for decades. One’s 70s are the time to open up with family members and personal representatives (e.g., executor). Current U.S. life expectancy is 79.11, although it averages in the mid 80s for those at age 70.

 

Long-Term Care (LTC) Planning- At age 70+, LTC insurance is prohibitively expensive or may be unavailable due to health issues. As a result, many 70-year olds address LTC needs “on the fly” with strategies such as self-insurance, selling assets, moving, and Medicaid divorces.

 

Simplification and Downsizing- An eighth decade of life increases the urgency to do this. Strategies noted in Flipping a Switch include creating a financial inventory, closing subpar accounts, consolidating “like” assets (e.g., IRAs), and shredding unnecessary documents.

 

Getting Help- Even the most dedicated “do it yourselfers” may need help in their 70s due to inexperience or physical challenges. Examples include tax preparation after RMDs start, financial planning, legal assistance, house cleaning, lawn mowing, and in-home care. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Money After 70: Financial Opportunities and Challenges-Part 1

I am currently creating a new Money After 70 course for older adults. Below is a brief summary of 10 changes, opportunities, and challenges for septuagenarians (people aged 70 to 79):

Social Security Benefits- Older adults should claim Social Security at or before age 70. After age 70, monthly benefits stop increasing, even if people continue delaying benefits. At age 70, workers receive 132% of their full retirement age benefit with delayed retirement credits added.

 

Qualified Charitable Distributions (QCDs)- Persons aged 70½+ can make QCDs from a traditional IRA directly to a qualified charity. The QCD counts as a RMD withdrawal for the year the donation is made and removes the donated amount from taxable income calculations.

 

Required Minimum Distributions (RMDs)- Mandatory formula-based withdrawals from tax-deferred plans must begin at age 73 for taxpayers born in 1951-1959 and at age 75 if born in 1960 or later. Income taxes are due on pretax saving contributions and retirement plan earnings.

 

Portfolio Longevity- A decade into retirement, especially during market downturns, 70+ adults may be concerned about making their money last a lifetime. Spending patterns, lifestyles, and goals may also change. To “stretch” assets, prior cash withdrawal methods may need tweaking.

 

Young Old to Old- Geriatricians often refer to three stages of later life: young old (ages 65-74), old (ages 75-84), and old old (age 85+). Others call these go-go, slow-go, and no-go phases. Both descriptions acknowledge movement during one’s 70s to a new stage of aging.

 

Accelerated Bucket List Completion- In their 70s, people start to wonder how many “good years” they have left with the vitality and mobility to achieve long-awaited travel plans and other goals. Some try to pack in as much as they can in their late go-go and early slow-go years.

 

Legacy and Charity- The older people get, the more the phrase “you can’t take it with you” rings true, especially when a financial advisor projects they will likely never run out of money.

Some people who have been “lukewarm” donors during their working years “step it up” after age 70 after realizing they have more than enough money to meet their own financial needs.

 

New Expenses- If these items have not yet already been purchased, people in their 70s often spend money for the first time on items such as hearing aids, walkers, wheelchairs, and dentures as well as services such lawn care, home care and, perhaps, long-term care.

 

Widowhood and Solo Aging- As married couples reach their 70s, the chance of widowhood increases, thereby leaving a surviving spouse who, if the couple had no children, is also a solo ager. Widowhood has many financial implications for housing and budgeting decisions.

 

Income Taxes- Some older adults have multiple streams of income, especially after RMDs begin. This can result in higher tax bills in their 70s than they paid previously and, perhaps, a higher marginal tax bracket. Taxes can increase also when a surviving spouse must file as a single taxpayer. This can trigger taxes on Social Security, for IRMAA premiums, and more.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.