A Lasting Mother’s Day Gift for the Mid-Market
By Betty Meredith, CFA, CFP®, CRC®
This Mother’s Day, reach out to three women who mean a lot you – your mother, aunts, sisters, cousins and even daughters – and review the following with them. As a pre-read to this article, I highly recommend the November, 2010 article by Eleanor Blayney, “Empowering, Educating, and Engaging Women Clients.” Below are some retirement-specific thoughts that build on Eleanor’s work for how you can improve the retirement security of the women in your life.
Women’s retirement security issue #1: In retirement, many women end up in poverty for the first time in their lives.
When planning for women and retirement, throw managing to life expectancy out the window. It’s all about protecting income for life. Here’s why:1
- At age 65+, there are 6 million more women than men.
- At age 70+, there are 5.2 million more women than men
- At 85+, there are 1.9 million more women than men, totaling 71% of the age 85 and older population.
- These 85+ numbers are expected to double and then triple over the next three decades.
- The median income of older women is $15,248, compared to older men’s income of $28,586.
How to help your mother, aunts, sisters, cousins and daughters.
Widowhood is a real risk. Ask them if they are aware of the following in the event their husband predeceases them (the checklist is from the Women’s Institute for a Secure Retirement (WISER)).2
- Expenses are likely to be 80 percent of what they were before the husband dies, but a widow’s income may only be two-thirds of what it was prior to the spouse’s death. Pension benefits from the husband’s work generally are reduced by 50%, and Social Security benefits may be reduced by a third or more.
- Federal pension law requires company and union pension plans to provide a joint and survivor’s benefit option. The survivor pension can only be given up if the wife gives her permission in writing.
- When selecting the pension benefit, a wife needs to consider the options very carefully. The joint and survivor annuity offers a smaller monthly payment than other pension benefit options. However, for women who expect to depend on their husband’s pension for a source of income in retirement, this is generally the better option.
- If a wife and husband chose a “joint and survivor’s benefit” when he retired, the widow will receive a benefit equal to half of what he had been receiving. However, it they did not choose that option, the pension benefit stops when the husband dies, because the payments would be based only on the husband’s lifetime.
- Different rules apply to certain other retirement savings plans, such as 401(k)s. Death benefits from a 401(k) are generally paid out in a lump sum, which can be rolled over – tax-free – into an Individual Retirement Account (IRA).
- If the spouse worked at a state, local or federal government job, then the widow must find out what the special rules are that apply to that pension.
Lifetime income solutions should be the heart and soul of a widow’s retirement income plan. As Eleanor 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 healthcare before adoption of an asset management plan. The non-profit organizations, Women’s Institute for Financial Education (WIFE) and WISER, recommend the use of fixed and variable annuities for women, even in retirement accounts, because they insure against women’s retirement-specific risks.3
Women’s retirement security issue #2: Caregiving doubles the jeopardy.
Of today’s unpaid caregivers:
- 57% are women caring for parents
- 21% care for their spouse
- 5% care for grandparents
- 4% care for siblings
- 13% care for other relatives or friends4
When women assume caregiver roles for elderly parents, they are 2.5 times more likely to end up in poverty; those who are single are four times more likely to end up in poverty. A recent study estimated the personal cost to women of caregiving for parents to be $324,044 due to lost wages, lost Social Security earned benefits, and other lost opportunity costs.5
One woman clearly understood how caregiving for her parents was going to affect her retirement security and Social Security benefits, so she required her two brothers, a doctor and a lawyer, to pay her a fair salary and benefits so they equally shared in the cost of her contribution to their parent’s quality of life.
How to help your mother, aunts, sisters, cousins and daughters
- Setup a family “Personal Care Agreement.” This a formal agreement drafted by elderlaw attorneys to help manage caregiving responsibilities and compensation, and can be used whether the caregiver is a family member or not.
- If they are considering leaving a job with benefits to care for a parent or other loved one, ask them to check if they’ve been at their job long enough to be fully vested in their 401(k) or other retirement savings plans, and that individual disability and health insurance is secured before they leave their job. Have siblings or others willing to help pay and report a salary for the caregiver so their 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 they’re caring for. 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 derails retirement.
In the midst of divorce negotiations, it is important for women to negotiate for a fair share of retirement assets. Under all state laws, a pension earned during marriage is a joint asset. Typically 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 for the women in your life or their hovering on the edge of poverty.
How to help your mother, aunts, sisters, cousins and daughters
1. 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 apension 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?
2. If any of the women in your life have divorced and remarried, ask them to check the beneficiary designations on their spouse’s life insurance, retirement and other accounts that they are counting on for retirement income in case their new husband passes unexpectedly. Defined benefit plans are required to name the spouse as the survivor, but IRAs, defined contribution plans (401(k), 403(b)) plans, and state and local government plans are not covered by this law and are not required to provide income rights to spouses in any form.
3. Evaluate the possibility of postponing the date of divorce if the marriage has lasted close to the ten year mark which entitles them to Social Security benefits based on the husband’s earnings.
A Game-changer for Women
In prior articles I’ve advocated the 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 the mid-market as they are most in danger of running out of assets. Hats off to the Treasury and Department of Labor for February, 2012 guidance on the use of longevity insurance within defined contribution plans. They are leading the retirement industry and 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 Advisors, describes this new ruling 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 – against living too long, 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 groundbreaking ruling are:
- Employers have resisted administering spousal consent rules since 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 spousal consent provisions are complied with before an annuity begins paying pre-retirement and post-retirement survivor benefits.
- The new ruling allows employees to invest their accounts in lifetime income benefits like longevity insurance all at once or over time.
- RMDs, which obstructed the offering of longevity annuities in IRAs and employer plans, are being relaxed to exempt the cost of the longevity annuity from RMDs up to a cost of 25% of the account or $100,000 as long as the payments begin by age 85.
- Plan administrators now 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 can now choose to offer employees the opportunity to purchase DB benefits with their DC assets.
How to help your mother, aunts, sisters, cousins and daughters
If they participate in an employer-sponsored defined contribution or defined benefit plans 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.
This Mother’s Day and every Mother’s day in the future, in addition to treating them to that favorite restaurant or sending roses, give a gift of lasting value by investing an hour in reviewing the points above with the special women in your life. Next year, check back with the first three, and then reach out to another three. Even if mid-market women aren’t your targeted client profile, ask your clients to use the suggestions above 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!
Betty Meredith, CFA®, CFP®, CRC® is the Director of Education and Research for theInternational Foundation for Retirement Education (InFRE), and Managing Member of the Int’l Retirement Resource Center, LLC. She participates in and incorporates research findings and best practices into InFRE’s Certified Retirement Counselor® certification study and professional continuing education programs to help professionals meet the retirement preparedness and income management needs of middle-market Americans.
A shorter version of this article was published in the April, 2012 Journal of Financial Planning. (www.FPAnet.org/Journal).
(c)2012, Betty Meredith
1 U.S. Census Bureau: Current Population Survey, 2009
2 Women’s Institute for Secure Retirement http://www.wiserwomen.org/index.php?id=278&page=Widow`s_Checklist
3 www.wife.org and www.wiserwomen.org
4 Evercare/NAC study of family caregivers
5 The MetLife Study of Caregiving Costs to Working Caregivers: Double Jeopardy for Baby Boomers Caring for Their Parents, June 2011
6 Women’s Institute for Secure Retirement http://www.wiserwomen.org/index.php?id=115&page=7_Key_Questions_You_Need_to_Ask_BEFORE_Your_Divorce_is_Finalized