A Lasting Mother’s Day Gift

Journal of Financial Planning: April 2012

Betty Meredith, CFA, CFP^®, CRC^®, is InFRE’s director of education and research. Meredith oversees incorporation of research findings and best practices into InFRE’s certification study and professional continuing education programs.

This Mother’s Day, reach out to three women who mean a lot to you—your mother, aunts, sisters, cousins, and even daughters—about retirement. This article builds on Eleanor Blayney’s “Empowering, Educating, and Engaging Women Clients” from the October 2010 Journal, to improve the retirement security of the women in your life—and your clients’.

Women’s Retirement Security Issue #1: Poverty

In retirement, many women end up in poverty for the first time in their lives. When planning for women in retirement, throw managing-to-life-expectancy out the window. It’s all about protecting income for life. Here’s why: 71 percent of people age 85 and older are women, and the median income of older women is $15,248 compared with older men’s income of $28,586.¹

Lifetime income solutions should be the heart and soul of a woman’s retirement income plan. As Blayney states in her article, options like annuities and reverse mortgages don’t fit the asset management business model of many planners. However, most women in retirement first need to protect against the risks of longevity and health-care costs before adoption of an asset management plan. The nonprofit organizations Women’s Institute for Financial Education (WIFE) and Women’s Institute for a Secure Retirement (WISER) discuss the use of fixed and variable immediate annuities for women, even in retirement accounts, because they insure against women’s retirement-specific risks.²

Women’s Retirement Security Issue #2: Caregiving

Caregiving doubles the jeopardy. Of today’s unpaid caregivers, 57 percent are caring for parents.³ When women assume caregiver roles, they are 2.5 times as likely to end up in poverty as noncaregivers; single caregivers are four times more likely to end up in poverty than married women.⁴ A recent study estimated the personal cost to women of caregiving to be $324,044 in lost wages, lost Social Security earned benefits, and other lost opportunity costs.⁵

How to help the women in your life:

• Set up a family “personal care agreement.” This is a formal agreement drafted by elder-law attorneys to help manage caregiving responsibilities and compensation, and can be used whether the caregiver is a family member or not.
• If the caregiver is considering leaving a job with benefits to care for a parent or other loved one, check whether she’s fully vested in her 401(k) or other retirement savings plans, and that individual disability and health insurance is secured before leaving the job. Have siblings or others who are willing help pay and report a salary for the caregiver so future Social Security benefits are not negatively affected.
• Many caregivers find themselves paying out of pocket for medicine and other medical needs of the person receiving care. Especially when there are siblings, agree in writing ahead of time how the other family members will equally help cover and reimburse these out-of-pocket costs if needed.

Women’s Retirement Security Issue #3: Divorce

Divorce derails retirement. In the midst of divorce negotiations, it is important for women to negotiate a fair share of retirement assets. Under all state laws, a pension earned during marriage is a joint asset. Usually one of the largest joint assets of the marriage besides home equity, retirement funds are not automatically split in a divorce. The temptation might be to go for assets of high present-day value, but securing a right to future retirement income could mean the difference between a comfortable retirement or teetering on the edge of poverty.

The following is a list of questions from WISER to be answered before a divorce is finalized.⁶

• Does your spouse have more than one pension or retirement plan from his current or previous job?
• Has he worked long enough to earn a legal right to the pension?
• Do you know how much he has earned or “accrued” in pension benefits under each plan?
• Do you need to have the benefit independently valued by a pension actuary or an accountant to calculate the lump-sum present value of the monthly pension?
• Do you know what information needs to be in the court order, decree, or property settlement before the pension plan will pay the benefits directly to you?
• Does the order clearly specify what amount is to be paid to you?
• Does the order provide for survivor benefits, so that your benefits can continue if your ex-husband should die first?

If any of the women in your life are remarried, ask them to check the beneficiary designations on their spouse’s life insurance, retirement, and other accounts in case their new husband dies unexpectedly. Defined-benefit (DB) plans are required to name the spouse as the survivor, but IRAs, defined-contribution (DC) plans (401(k), 403(b)), and state and local government plans are not.

And if possible, evaluate postponing the date of divorce if the marriage has lasted close to the 10-year mark, which entitles a wife to Social Security benefits based on the husband’s earnings.

A Game Changer for Women

In prior articles I’ve written about use of longevity insurance—a new type of deferred annuity that pays a lifetime income beginning at ages 80–85—as a means of simplifying planning for members of the mid-market most in danger of running out of assets. Hats off to the Departments of the Treasury and Labor for the February 2012 proposed guidance package on the use of longevity insurance within defined-contribution plans. They are leading the retirement industry in shattering a decades-old logjam within defined-contribution plans for the use of annuity payout options.

Some think this is a political move or a ploy of the annuity industry. If anything, annuity products are about to become institutionally priced and scrutinized because of this ruling. I have been involved in conversations within groups in the employer-sponsored defined-benefit, defined-contribution, actuarial, product, and nonprofit spaces for at least a decade, and the focus has been on how to provide low-cost access to annuitization.

The February 2, 2012, report “Supporting Retirement for American Families,” issued by the Council of Economic Advisers, describes the proposed rules in detail. The report gives an example of a longevity annuity for a 65-year-old costing about $35,200 to provide a guaranteed stream of payments of $20,000 a year beginning at age 85, versus $277,500 for an immediate annuity that produces an annual income of $20,000 a year. Longevity annuities provide the “bookend” needed to protect women—and men—from outliving their money by carving out a reasonable slice of assets today to pay a guaranteed future annual benefit, allowing the retiree to keep and manage the rest of her wealth until that time.

Other highlights of this initiative are:

• Employers have resisted administering spousal consent rules; they’re not required to do so now in DC plans. The Treasury and the IRS have clarified that the insurance company issuing the annuity will make sure the plan administrator complies with spousal consent provisions before an annuity begins paying preretirement and post-
  retirement survivor benefits.
• Employees are allowed to invest their accounts in lifetime income benefits such as longevity insurance all at once or over time.
• Required minimum distributions (RMDs), which obstructed the offering of longevity annuities in IRAs and employer plans, could be relaxed to exempt the cost of the longevity annuity from RMDs up to a cost of 25 percent of the account or $100,000, as long as the payments begin by age 85.
• Plan administrators could have the option of offering employees a partial annuitization of their DB plan benefits instead of forcing the employee to choose between a lump sum or annuitization of the entire amount.
• Employers with both DB and DC plans could choose to offer employees the opportunity to purchase DB benefits with their DC assets.

If the women in your life participate in an employer-sponsored defined-contribution or defined-benefit plan or have an IRA, be sure they start asking and continue to ask their plan sponsor about these new opportunities for lifetime retirement income. It will take awhile before they are readily available.

On Mother’s Day, in addition to treating the special women in your life to their favorite restaurant or sending roses, give a gift of lasting value by investing an hour in reviewing their prospects for a healthy retirement. And even if mid-market women aren’t your targeted client profile, ask your clients to use these suggestions to help their mothers, aunts, sisters, cousins, and daughters be better prepared for retirement. It might be the best client relationship building investment you’ll ever make!

Endnotes

1. U.S. Census Bureau, 2009, Current Population Survey.
2. Bahr, Candace, and Ginita Wall. “Protecting Income in Retirement.” www.wife.org; The Actuarial Foundation and WISER. 2004. Seven Life-Defining Financial Decisions. www.actuarialfoundation.org/consumer/wiser_life-defining.pdf.
3. Evercare and the National Alliance for Caregiving. 2007. Family Caregivers—What They Spend, What They Sacrifice.
4. Almond, B. J. 2004. “Study Finds Women Caregivers Are More Likely to Face Poverty.” Rice University News and Media Relations (September 2).
5. MetLife. 2011. Caregiving Costs to Working Caregivers: Double Jeopardy for Baby Boomers Caring for Their Parents.
6. Moss, Anne E., n.d., “7 Key Questions You Need to Ask BEFORE Your Divorce Is Finalized.” Women’s Institute for a Secure Retirement.