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4 Retirement Planning Steps for Women

Women face some specific challenges that men don't


(This article originally appeared on MarketWatch.com.)

If you’re a woman trying to plan your retirement, the bad news is that you face some specific challenges that men don’t. The good news? Women tend to invest and save in a way that bodes well for their retirement success.

There’s more good news: retirement planning is not rocket science. By following the key strategies detailed below, women can go a long way in preparing for a financially stable future. And that future is helped by general characteristics that women tend to exhibit more than men.

Specifically, women’s tendency to stick with a long-term investment plan — rather than trading in and out of investments the way men are likelier to do — leads to higher returns over time. Plus, men are often more confident than women of their own investing skills.

Given that women tend to live longer than men, it’s even more important they think carefully before making the decision to claim Social Security.

While confidence isn’t a bad thing in and of itself, when it comes to investing, confidence can lead to problems, such as buying into companies or mutual funds without doing enough research. Women tend to ask more questions before investing, financial advisers say, and then once they decide on the investment plan that’s right for them, they stick with it.

Of course, women comprise a lot of different types of people, living in many different financial situations. Whether you’re single or married, wealthy or not, these and other factors will affect how you plan and save for retirement. But the strategies below are a good place to start for people in just about any situation.

Step 1: Start saving, and then save more

By now, just about everyone knows it’s important to save for retirement. Currently, the average Social Security payment is about $1,320 a month. That’s just $15,840 a year.

Most Americans would like to be able to spend more than that in retirement. If you’re among them, it’s never too late to ramp up your savings and invest so your money can grow. (Keep in mind that if you’re five years or less out from retirement, it’s important to review carefully how much money you have invested in the stock market. Any money you’re going to need in five years should be in a safer investment, because you may not have time to recover from stock-market losses in such a short time period.)

For women, the directive to save is even more important than for men. Why? On average, women live at least a couple of years longer than men. Plus, women are likelier to take time off from the workforce — generally to care for children or elders — and that can lead to lower lifetime savings.

So, next question: How much should you be saving each month? If you’re too busy with life to get down to specifics, then one rule of thumb is to save 20 percent of your income. If you’re not there yet, that’s OK; just set 20 percent as your goal and ramp up your savings rate each year, plus every time you get a raise or an unexpected windfall.

If you’re ready to get into the details of how much you need to save for retirement, then consider this: focus on your spending.

Estimating how much you will spend in retirement helps clarify what you need to save. The easiest way to start is to track current spending — use Excel or try an online tool like Mint — and then figure out which of your current expenses will remain a part of your lifestyle when you’re retired. And don’t forget to add in any projected retirement expenses, such as health-care costs.

Looking at your spending now can yield myriad benefits. For one, it may help you identify ways to cut costs now, while you’re working. That has two benefits: it increases the amount of money you can stash away now, and it helps you prepare now to live on less in retirement. If you can resist that pricey tech toy that you want but don’t need, or start cooking more at home, your future retirement could be a lot more relaxing.

To figure out how much in total you need for retirement savings, consider the 4 percent rule. That rule says you can withdraw 4 percent of your money in the first year of retirement — assuming it’s invested in a diversified investment portfolio — and the same amount, adjusted for inflation, each year after that. Your portfolio will survive as long as you do. (Given today’s ultralow bond rates and lower expected stock-market returns, some financial experts say a 3 percent rule makes more sense.)

The 4 percent rule makes it easy to figure out how much you need to save. Just multiply your annual spending amount by 25 to get the total dollar amount of savings you need to have on hand before you retire. For example, if you expect to spend $30,000 a year from retirement savings (not counting Social Security or other sources of income), then you need to save $750,000 before you retire.

Step 2: Invest your savings

So, you’re on board and you’re either saving 20 percent of your salary or you’re on track to do so. Well done! Now what? You want to invest that savings so you can enjoy long-term gains. Here are some tips on investing.

First, stash some reserves.

Investing is important. But don’t put all of your money in illiquid (read: hard-to-cash-out) accounts. When the car breaks down, you want to have money set aside, available, to pay for that bill. Whatever you do, you don’t want to rack up credit-card debt to pay for emergencies. To clarify: it does make sense to pay with your credit card for reward points and cash, but only if you’re able to pay off the full bill, not just the minimum payment, each and every month.

Where your emergency reserves should sit is the question. You don’t want that money in your 401(k) or other retirement account, because these so-called “qualified” accounts, aka “tax-advantaged,” will charge you a hefty penalty, plus taxes, if you withdraw money early. (The exception is Roth IRAs, from which you can, in some cases, withdraw your contributions, not your earnings, without taxes or penalty. But be sure to read the rules carefully before thinking of your Roth as an emergency savings account.)

One idea: Store your emergency savings in an online savings account. While banks aren’t paying much interest on savings these days, online bank accounts generally pay more than do banks that have actual branches you can walk into. Consider setting up an automatic transfer so a small amount goes from your checking account into that savings account every month. When you’re hit with an unexpected expense — and it will happen — use your credit card to pay (and earn rewards) and then transfer the necessary funds from the online bank to the bank account from which you pay your credit-card bills.

Another question is how much to set aside in emergency reserves: financial planners these days often advocate six months to one years’ worth of salary. If that seems overwhelming to you, start small and build from there. You’ll feel better having even a couple hundred dollars stashed away.

Next, invest your retirement savings

Remember what we said above, how retirement planning is not rocket science? While some people like to spend hours tracking stocks online, you don’t need to be a day trader to enjoy stock-market gains. For people who simply want to invest for retirement, without monitoring the markets every day, consider a diversified mix of low-cost index mutual funds.

Let’s back up. Before you start investing, you need to consider an asset allocation plan. What percentage of your retirement savings do you want to invest in stocks versus bonds? One simple, conservative rule of thumb is to invest “one hundred minus your age” in stocks. Thus, a 40-year-old would invest 60 percent of her money in stocks and 40 percent in bonds. That assumes you’ll stay invested until retirement. (To avoid raiding that money early, revisit the section above about creating emergency reserves.)

Once you have an asset allocation plan, it’s time to start investing in low-cost, index mutual funds. Making sure you’re diversified is also important, so if one area of the market starts to fall, your other investments will help maintain the stability of your overall portfolio. But keep in mind that being diversified doesn’t mean investing in a whole bunch of mutual funds. You can be diversified with just three mutual funds; the key is picking the right ones.

For a straightforward guide to low-cost investing, look no further than MarketWatch’s Lazy Portfolios. Each of the eight Lazy Portfolios holds 11 mutual funds or fewer; a couple of the portfolios hold just three mutual funds.

One idea is to pick the portfolio that makes the most sense to you and then try to mimic it in your 401(k) or other retirement-savings vehicle. You may not have access to the same mutual funds, but look for mutual funds that have the same basic investment goal, such as “total international stock index fund.”

Another idea is to consider a low-cost target-date fund. These mutual funds invest in other funds and manage your asset allocation for you. These products are convenient — but convenience never comes free, so compare fees before buying in.

Once your money is invested in a diversified mix of low-cost index mutual funds, all you need to do is check up on it once or twice a year to see whether you need to rebalance; that is, push some of your money toward specific investments to make sure your asset allocation plan wasn’t pushed out of whack by, say, big gains or losses in the stock market.

Investing in the financial markets isn’t rocket science, but it can be a volatile place. Keep your eye on the long term, and remember that people with diversified portfolios who stayed in the market during the 2008-09 crisis made their money back, and then some.

And don’t forget to mind the fees when picking investments. One of the easiest ways to keep your retirement savings on track is to make sure that fees aren’t taking a chunk of your money.

Take this example: A $100,000 investment that earned a 4 percent annual return over 20 years would total $210,000 if annual fees were 0.25 percent. But if annual fees were 1 percent, the total portfolio would add up to only $180,000 — a $30,000 cut!

Once you have an asset allocation plan, it’s time to start investing in low-cost, index mutual funds. Making sure you’re diversified is also important, so if one area of the market starts to fall, your other investments will help maintain the stability of your overall portfolio. But keep in mind that being diversified doesn’t mean investing in a whole bunch of mutual funds. You can be diversified with just three mutual funds; the key is picking the right ones.

For a straightforward guide to low-cost investing, look no further than MarketWatch’s Lazy Portfolios. Each of the eight Lazy Portfolios holds 11 mutual funds or fewer; a couple of the portfolios hold just three mutual funds.

One idea is to pick the portfolio that makes the most sense to you and then try to mimic it in your 401(k) or other retirement-savings vehicle. You may not have access to the same mutual funds, but look for mutual funds that have the same basic investment goal, such as “total international stock index fund.”

Another idea is to consider a low-cost target-date fund. These mutual funds invest in other funds and manage your asset allocation for you. These products are convenient — but convenience never comes free, so compare fees before buying in.

Once your money is invested in a diversified mix of low-cost index mutual funds, all you need to do is check up on it once or twice a year to see whether you need to rebalance; that is, push some of your money toward specific investments to make sure your asset allocation plan wasn’t pushed out of whack by, say, big gains or losses in the stock market.

Investing in the financial markets isn’t rocket science, but it can be a volatile place. Keep your eye on the long term, and remember that people with diversified portfolios who stayed in the market during the 2008-09 crisis made their money back, and then some.

And don’t forget to mind the fees when picking investments. One of the easiest ways to keep your retirement savings on track is to make sure that fees aren’t taking a chunk of your money. Take this example: A $100,000 investment that earned a 4 percent annual return over 20 years would total $210,000 if annual fees were 0.25 percent. But if annual fees were 1 percent, the total portfolio would add up to only $180,000 — a $30,000 cut!

Step 3: Think carefully before claiming Social Security

Given that women tend to live longer than men, it’s even more important that they think carefully before they make the decision to claim Social Security. Once you claim benefits, you can’t turn them off (there’s a limited exception to this).

While it makes sense for some retirees to claim benefits at age 62 — for example, someone who is in poor health — for most others it makes sense to delay claiming as long as possible. Your benefit rises by 8 percent a year, not including cost of living adjustments, each year you delay claiming, up to the age of 70. Of course, if you die in your early to mid-60s, delaying claiming will have been the wrong decision — but at that point it won’t matter to you, right?

And there’s a good chance you’ll live longer. Average life expectancy for a 65-year-old woman today is about 86. But that’s just an average — many women will live long beyond that age. (The average life expectancy for a 65-year-old man today is about 84.) Consider this: About one out of four 65-year-olds living today will live past age 90, and one out of 10 will live past age 95, according to the Social Security Administration.

Think of Social Security as longevity insurance. The longer you can delay it (up to age 70), the higher your benefit goes — meaning there’s more likelihood that benefit will support your needs later in life.

Step 4: Don’t neglect your estate plan

No one really likes to think about their estate plan — no surprise, given that it suggests your own death. But it’s an important aspect of personal finance, given that dying without a plan can leave your family in dire straits.

The first step is to take a look at the beneficiary designations on your retirement and other financial accounts — make sure the right person is named as a beneficiary. Also, talk to your bank to make sure your heir can access your bank accounts after you die (ask about a “transfer on death” or similar designation). A big mistake people make is neglecting these designations, which often determine how savings get paid out to heirs.

Next step: start the conversation. Who will take care of you and manage your finances if a serious illness strikes? If your spouse dies, what does that mean for your monthly income? If a parent falls ill, are you the default caregiver or can you plan now to share that responsibility with siblings or other relatives?

Third tip: No matter what your age or income, get these items in order:

  • A financial power of attorney, naming the person who will make money decisions for you if you can’t
  • A health-care power of attorney, for health-care decisions
  • A living will for your end-of-life wishes
  • A will naming a guardian for minor children

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