Journal of Financial Planning: May 2021
Alexandra Armstrong, CFP®, CRPC, was one of the first female CFP® practitioners in the U.S., as well as first female president of IAFP (precursor to the FPA). She founded her financial planning firm in 1983 in Washington, D.C. Since then, she has focused on helping women achieve financial independence.
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When working with women as clients over the years, I have observed that sometimes we planners make certain assumptions that may be incorrect about their retirement planning. In this article, I review some of these and welcome any input from you on this topic.
Misconception 1: Retirement Planning Is Primarily for Married Couples
Perhaps you have noticed that most pictures you see about retirees show a happy and healthy couple walking hand in hand on the beach. However, according to the U.S. Census Bureau, in 2020 there were 126.9 million single people (never married, divorced, or widowed) age 18 and older. Even more astounding, Pew Research Center reports that 85.4 million Americans have never married. According to another report from the U.S. Census Bureau published in 2020, of the U.S. population age 15 or older, 35 percent of men and 30 percent of women had never married. This was up from 1990 when 30 percent of men and 23 percent of women had never married. More people are not getting married—whether through choice or circumstance.
So, what are the implications of this data? Is planning different for never-married people than for married people? The answer is definitely yes. One difference is that they may not have children to help them as they age (actually, even married people can’t always count on their children for help as they age, but that’s a discussion for another day). As a result, the idea of aging in place may not be an option for this group of people. One client I spoke with said the reason she moved to a retirement community was to avoid being a burden on her nieces and nephews. This way, she and her family knew she would be taken care of for the rest of her life.
Another difference, in most cases, is they only have themselves to rely on for financial support as they age, which makes accumulating retirement savings even more important. In addition, if they have health issues, the need for long-term care insurance is more important.
Misconception 2: Career Women Know How to Manage Investments
Whether married or single, I have had several successful career women as clients who had no clue about investments, let alone retirement planning. One case involved a lawyer who deferred investment planning to her husband, only to find when they got a divorce when she was in her 50s, he hadn’t done a very good job of managing their investments. She was so busy being successful that she had delegated this task to him, to her regret. Fortunately, she discovered this soon enough that she still had time to make up for lost time.
Another successful single career woman who was a client of mine was an executive at a Fortune 500 company. She earned a good salary and enjoyed her life in New York City in a rent-controlled apartment. She had accumulated a retirement fund of about $1.5 million, which sounded good until we examined her cost of living. At age 60, she cheerfully told me that she intended to live to age 100. After we examined her expenses, I informed her that given her current rate of spending, she would run out of money in 10 years! Furthermore, in her chosen field, age discrimination was rampant and the chances of her maintaining her current salary level much longer were dim. I must give her credit because she took the news seriously and revamped her retirement plans. She was able to postpone her retirement date, although it meant taking reduced income. She also started looking for a place to live in Florida where the cost of living would be lower.
These are just two examples, but I could share with you many more. This is why we as planners should embrace the concept of educating women as early as we can about the importance of accumulating retirement funds that will last as long as they will—enabling them to be truly financially independent.
I have read the recent articles about people underspending in their retirement. While this may be true of some clients, we have others whom we must warn about curtailing their expenses. Often, they aren’t just paying their own expenses, but are also contributing to their grown children and grandchildren. When working—whether married or single—they may have had good salaries and not adhered to any kind of budget. When they retire, some have a rude awakening. As one of my lawyer clients who was close to running out of money at age 95 said to me, “I didn’t expect to live this long!”
Misconception 3: Everyone Understands How Social Security Works
As I stated in my recent book about retirement, Social Security is a “quagmire,” and everyone’s situation is unique. As planners, we assume that everyone understands how Social Security works and the consequences of timing when you start taking your benefits. However, I think this is where many clients make mistakes—sometimes irrevocable. Often, I find that they aren’t even aware of the most basic information, like the full ramifications of how their income could be reduced for the rest of their lives if they start taking Social Security income at age 62, as compared to the amount they would receive if they waited until they reach full retirement age (FRA). Or how much higher their income will be if they waited until they reach age 70 to collect Social Security benefits.
I often find many of my clients—not just females—aren’t aware that before they attain FRA, in 2021 if they earn over $18,960, their Social Security will be reduced by $1 for every $2 earned above that amount. Even if they do understand that, do they realize they must have worked a total of 40 quarters to be eligible to receive Social Security income? Even more important, do they understand that their retirement benefits are averaged over their 35 highest earning years adjusted for inflation? This means if they only have 30 years of earnings, then five years will be entered as zeros, which will reduce their retirement income. It also means if they work more than 35 years and earn a good income, they might be able to shed some of her lower earning years and, thus, increase their Social Security income. For women, this information is very important since they might have dropped out of the workforce sometime during their working years.
For a divorced woman, does she realize that if she had been married 10 years or more, is currently single, and she and her former spouse are 62 years or older, she can apply for half of her former spouse’s benefit while he’s still alive? And if her former spouse predeceases her and she is age 60 or older, she’s entitled to her ex-spouse’s full benefits, even if she remarries? (In both cases, this assumes that this benefit is higher than what she would have received based on her own working record.) And the one that blows my mind—does she realize if he has remarried, his widow is also entitled to receive the full benefit? No wonder Social Security is in trouble!
Does she know how easy it is to establish a Social Security account and periodically check her potential benefits? The Social Security Administration is actually pretty efficient, but it’s best to double-check your records against theirs while you can still make corrections.
Misconception 4: Everyone Understands the Taxable Implications of Different Sources of Retirement Income
I remember talking to one client about our projections about her retirement income. When we put together a list of her expenses, it hadn’t occurred to her to budget for taxes. She assumed that all her investments—both retirement and nonretirement—were one big pool from which she withdrew monthly income and, somehow, she hadn’t focused on the fact that different investments were taxed at different rates, or not at all. I explained to her how we needed to balance withdrawals from her personal investments, which were taxed at different rates (capital gains, tax-free income, qualified dividends, etc.), and her retirement income, most of which was taxed as if it were earned income.
I also explained how we could arrange it so she would have a monthly “allowance” set up to automatically go into her checking account, carefully balancing the different sources of income and making sure enough was set aside of taxes. Many people (not just women) love the idea of having a regular income to replace their paycheck.
When retiring, housing is a major consideration that I’ll discuss—particularly from a woman’s point of view—in my next column.
