For many women, retirement isn't the relaxing haven it's cracked up to be. Because women earn less over their lifetime than men and live longer in retirement, they also tend to have less saved. According to a Government Accountability Office report, 12 percent of women over age 65 are living in poverty, compared with only 7 percent of men. For divorced and widowed women, the poverty rate is higher, at 21 and 15 percent, respectively.
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Even those with incomes over the poverty level often face hardship. Nursing homes, which women have a greater chance of entering because they generally live longer, cost an average of $71,000 a year, and assisted-living facilities can cost $32,000 annually.
What can women do to protect themselves? A lot, it turns out. Here are six strategies:
Save more. The Women's Institute for a Secure Retirement recommends that women develop three sources of money: Social Security, a pension or retirement savings plan such as a 401(k), and individual savings. Partly because women frequently take time out of the workforce to care for children or parents, their Social Security benefits and retirement savings tend to be less than men's, making it more important to store up additional dough.
Start earlier. Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl's Guide to Personal Finance, recommend that women dedicate 10 percent of their income to retirement savings, starting in their 20s. Saving 10 percent of a $50,000 salary beginning at age 25, for example, would result in $2.2 million at retirement. (That calculation assumes that investments grow at 10 percent a year, gains are reinvested, and annual salary increases offset inflation.)
Maintain management skills. Traditionally, marrying couples turned over the finances to one person to manage. But women who want to keep their investing and budgeting skills sharp for life should keep a hand in their finances. Since women live to be 80 on average, versus 75 for men, even those in solid marriages are likely to have to manage their own money one day. According to the Women's Institute for a Secure Retirement, only one third of women between ages 75 and 84 are married. Over 85, the number drops to 13 percent.
Consider a spousal IRA. Nonworking spouses, such as those who are taking time out of the workforce to care for children, can still contribute up to $4,000 a year to a retirement account. (In 2008, the maximum contribution will increase to $5,000, and after that it will be adjusted for inflation.) While in most cases wives are entitled to at least part of their husbands' retirement savings in the case of death or divorce, pensions often decrease if the working partner is no longer living.
Overestimate money needs. Because people are living longer and inflation erodes the value of money, many underestimate their savings needs. The Women's Institute for a Secure Retirement says that women, given their longevity and lower savings, may want to consider replacing 100 percent of their income during retirement to keep up their lifestyle.
Manage your own money. A study from the Hartford Financial Services Group and the MIT AgeLab found that couples who divide financial tasks, where one spouse handles day-to-day bill paying and the other investment management, fare better than those who hand over the financial reins to one person while the other takes a back seat. The couples with the divide-and-conquer approach were more likely to have more savings and develop a financial plan for the surviving spouse. Yet only 11 percent of respondents practiced this kind of shared division of labor.
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In couples where one spouse (usually the husband) took charge of all financial matters, the other spouse (usually the wife) often faced financial struggles later in life. The problem with that approach, practiced by one third of the couples, is that when husbands die, women often find themselves with less money than expected, and they don't know how to manage it. On average, Hartford reports, women experience a 50 percent decrease in income upon becoming widowed and only a 20 percent decrease in expenses.
Although women 65 and older are three times as likely as men to survive their spouse, many men face the same challenge. That's why it's important for women—and men—to stay involved in managing their finances. Hartford suggests that every couple should be able to answer these three questions, well before retirement:
• If my spouse were to die, how would that affect the household's income?
• What would an expensive illness do to our retirement savings?
• If either spouse were to die, would the survivor be prepared to take over management of the finances?
Each spouse should also know how much the couple spends each month, the location of savings and investments, and how to access the funds. Couples can also involve a trustworthy financial adviser, especially if one spouse is not comfortable with investment decisions.
As spouses have long known and behavioral economists confirm, a chief benefit of marriage is that it lets individuals focus on what they are good at—whether it's earning money, running a household, or a mix of the two—and benefit from their partners' skills as well. But too much specialization can one day leave a widow or widower in the dark when it comes to essential financial skills and knowledge. A system that involves both partners keeps either from having to teach himself or herself under stress later.