The warning bells about America's pending retirement income crisis may be ringing loudest for women — the largest and least prepared group entering retirement.
As a cohort, women tend to live longer, earn less and have less direct experience with retirement planning. Women are more likely to work in part-time jobs without a retirement plan, according to the Labor Department.
Also, they step away from careers to take care of family members more often than men. The result: Women generally spend fewer years in the workforce, contribute less to retirement plans and ultimately, have less saved for a nest egg.
A study released last month by LIMRA found that even though women are more concerned than men about risks that they face in retirement, about one-third of them had done no retirement planning.
For financial advisers who serve women at or near retirement, these obstacles and others — from divorce and widowhood to a lack of savings or preparation — can be daunting. But with an engaged planning process and a retirement income plan that layers traditional retirement savings with guaranteed income, female clients can move into retirement with greater confidence that they won't outlive their assets — even in this climate of low interest rates.
ASKING FOR DIRECTIONS
Advisers who work with female clients on retirement plans need to start with education. We have found women want to make their own decisions, and they aren't afraid to ask questions.
Knowledge is key for retiring women. To coin a new phrase from an old stereotype: “On the road to retirement, women pull over and ask for directions.”
A recent study by Joanne Hsu of the Federal Reserve reinforces our experience that female clients gain financial skills as they get older.
She found that as a result of the traditional household division of labor, many married women tend to be less financially literate than men. But as they age, 80% of women catch up with their husbands in terms of financial knowledge.
Building client knowledge has the added benefit of reducing the angst that many women feel about retirement readiness, overcoming the fear of becoming a “bag lady” during retirement. Providing objective information in an empathetic way removes this emotional trigger and leads to a more rational and successful planning process.
THE FOURTH LEG
With clients engaged in the process, the next step is building a stable plan. In the good old days, retirees were able to rely on a “three-legged stool” approach to retirement planning.
Income from a pension or 401(k), Social Security and personal savings — typically built with plenty of fixed-income exposure — did an adequate job of funding retirement.
But with yields at historic lows and with many women needing to catch up on retirement savings, the three-legged approach doesn't provide enough income or opportunities for growth.
We have added a fourth leg — a contingent deferred annuity — to a portion of a client's portfolio. The CDA, a lifetime-income guarantee issued by an insurer, covers an investment account typically made up of mutual funds and exchanged-traded funds and pays a guaranteed stream of income.
With a portion of their portfolios insured, clients are more willing to invest the remainder of their savings more aggressively, with the goal of increasing the value of the overall portfolio. In this case, the CDA allows female clients to invest for income and growth and to stay the course when markets are volatile.
It also provides a degree of control and flexibility that is unusual with guaranteed-income products.
Clients can also stop using a CDA with no surrender charges and no need to sell portfolio assets.
Research by Milliman Inc. shows that higher portfolio withdrawal rates can be supported at confidence levels comparable to what is typically provided by recommended mutual fund-only withdrawal strategies, at about 4%.
The study also suggests that clients who delay retirement until 70 can use a CDA to “stay the course” — maintaining higher equity percentages in their portfolios and achieving confidence levels for total target income comparable to mutual-fund-only strategies.
For women at or near retirement, this can mean the difference between surviving retirement and thriving during it.
Kimberly Foss is the president and founder of Empyrion Wealth Management Inc.