Stacy Francis is the President and CEO of Francis Financial & founder of Savvy Ladies™, empowering women to achieve financial independence.
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For some people, their stars align, and everything ends up working out. Many of us may look at those people and think, "If only I had that feeling of security in my retirement." But many of us, especially women amid the Covid-19 pandemic, might struggle financially during our “golden years.”
The pandemic has caused many women to experience reduced hours and unemployment, with some even exiting the workforce to take care of children. As we get through this rough patch, the long-term effects will be seen in terms of retirement benefits that women will want to access in their future. Alarmingly, a 2016 survey found that one in five “older” households (i.e., those in which the respondent or their spouse were age 55 or over) made less than $22,000 per year.
The financial problems for older women have steadily worsened over time as life expectancies have increased and medical expenses have soared. Women receive smaller Social Security benefits than men because women still tend to earn less, and this lower wage base is factored into their benefits. Also, women typically have fewer years in the workforce during their careers. Due to caring for young children or other family members, the majority of part-time workers are women, another factor that further reduces benefits.
These factors create significant headwinds for women. In 2017, women ages 65 and older received on average $14,353 in annual Social Security income, compared to $18,041 for men.
A divorced woman is entitled to benefits based on her former spouse’s earnings if she is still unmarried and the marriage lasted 10 or more years. She can choose between the higher of 100% of her benefit or half of her ex-spouse’s benefit. Even with these options, the proceeds might not add up to much.
Many Social Security recipients are dependent on these checks to cover almost all their monthly bills and have few other income sources. Social Security was never meant to be a primary income source in retirement and is merely meant to supplement your savings.
However, more women are entering their golden years financially ill equipped. While we navigate through this pandemic, women should know that there are ways to align their finances favorably for the future and financially recover from this time.
Know Your Benefits
First, use a Social Security Retirement Estimator to get an idea of your future benefit, based on your actual Social Security earnings record. Predicting how much you are going to spend in retirement is difficult, but a relatively accurate and easy method is to use your current lifestyle expenses to calculate your retirement expenses.
A widely accepted rule of thumb is that, in retirement, you’ll need to replace 70%-90% of your income to maintain your standard of living. A SmartAsset study, using Bureau of Labor Statistics data from 2016, found that the average retired household spends 25% less than the average working family. This study found that while expenses such as housing and transportation plummet in retirement, healthcare spending soars by nearly 44%.
We encourage women to target covering 80% of their spending so they have some flexibility.
Fill The Social Security Shortfall
Once you have your projected monthly retirement income benefit, calculate the shortfall between your expected retirement expenses and your benefit. Once you have determined today’s expenses, reduce them to 80% of your current costs. The difference between your monthly benefit and your anticipated expenses is the amount you need to pull from other sources to make up for the shortfall.
For example, Randi is looking to retire in 10 years. Her current yearly costs (without income taxes) total $60,000. Assuming the 80% rule, her spending in retirement will drop to $48,000. Based on her Social Security earnings record, Randi is entitled to the benefit of $30,000 per year when she retires at age 65, leaving a shortfall $18,000. Randi will need to find additional income to plug this hole in her budget.
Randi can shore up her financial future by saving in a retirement plan and withdraw this money over time to bring her up to her needed $60,000 per year. But how much must Randi save to cover the shortfall?
Randi can find the answer to her question by using the 4% rule. The rule refers to a 4% withdrawal rate or, the amount of money you might safely withdraw each year from your portfolio in retirement, based on research by financial planner William Bengen. His original research found that a 4% withdrawal rate would allow a person’s retirement money to last 30 years if it was allocated equally between stocks and bonds. Using the 4% rule, Randi can discover how much money she needs to save now so that she can pull an extra $18,000 per year out without depleting her nest egg.
Taking the assumed yearly withdrawal of $18,000 and dividing it by 4%, we find that Randi needs at least $450,000 saved in a diversified portfolio. Plan to save enough to have your total required amount as of day one of your retirement.
Filling The Gap
Some women may have the option to continue working and delay collecting Social Security until age 70. Each year that you postpone claiming, your benefit will grow by another 8%. All in all, delaying Social Security to age 70 can increase your income to 132% of your full monthly benefit.
Retirees can’t rely on Social Security alone. Savings are essential to protecting women from living below the poverty level after age 65. Start saving a minimum of 10% of your income each year in a retirement plan to fill the shortfall. Each year you get a raise at work, be sure to give your savings an increase, too. Continually increasing your savings will ensure you are on track to have a happy and financially sound retirement.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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