- By Kerry Hannon
When it comes to a comfortable retirement, the prospects aren’t pretty for women. As I noted in a previous Next Avenue post, we generally have lower salaries and longer life spans than men, we spend more time away from the workforce to raise children or care for aging relatives and as a result our retirement and Social Security benefits get nicked.
Little wonder that the poverty rate among people 65 and older is nearly twice as high for women as for men: 9 percent versus 5 percent.
So I was grateful to see that a recent report by the Government Accountability Office came up with 22 proposals to address the problem of women’s financial woes in retirement. The GAO interviewed experts in government, academia, advocacy groups and the private sector to come up with its list of reforms for Social Security, 401(k) plans and private pensions. Although their proposals could help men, they favor women more.
(MORE: Why Women Need to Embrace Retirement Planning)
In honor of National Save for Retirement Week (you hadn’t heard?), I decided this is an appropriate time to talk about my five favorite proposals. But first two caveats:
First, the report said pension experts were concerned that women may not be as “financially literate as men, hindering them from taking full advantage of options for saving for retirement.” I found this comment patronizing, although there’s undeniably a smattering of truth to it.
Second, all the suggestions have cost implications. “While the federal government could bear some of these costs, workers and (retirement) plan sponsors could be responsible for others,” the report said.
That said, I’m delighted these proposals are on the table. My favorites:
Require automatic individual retirement accounts. Employers who don’t offer pension plans would need to automatically enroll employees in IRAs unless the employees opted out. Some analysts favoring automatic IRAs have suggested excluding firms with fewer than 10 employees.
Bills requiring automatic IRAs have been introduced in the four most recent Congressional sessions, but haven’t gained traction. Most likely, that’s because they’d result in a loss of federal tax revenue and add some administrative burdens for employers.
(MORE: 5 Ways Women Can Be More Confident Investors)
Nonetheless, automatic IRAs make sense to me. They’d get women to save more for retirement during their working years, which would pay off if they take time off for family reasons. I also know that when saving for retirement is discretionary, it’s easy to put off.
When I worked for an employer who automatically took money out of each paycheck for my 401(k), I didn't notice or feel the deductions. And then, when the quarterly statement showing how much money I'd socked away landed would come, I couldn’t believe how great it felt.
Shorten vesting periods for retirement plans. It can take as long as six years for 401(k) contributions to be vested. Reducing this period would encourage contributions and increase retirement benefits for women with shorter job tenures. One of the report’s proposals calls for lowering vesting requirements to two to three years.
Work harder educating the public about the impact of delaying Social Security benefits. It’s true that you can get an estimate of your future Social Security benefits and a record of your lifetime earnings history at Socialsecurity.gov. And that statement has a section showing how delaying the date you start collecting Social Security checks can increase the amount you’ll receive. But the message doesn’t seem to be sinking in.
These days, many people elect to begin claiming Social Security as soon as they turn 62, the earliest age they can. Surveys show the public is largely unaware that delaying claiming Social Security from age 62 to 70 will increase benefits by about 8 percent a year.
And as I noted in another Next Avenue piece, financial advisers aren’t doing a great job advising women about when to take Social Security.
Better educational outreach from the government is necessary. It’s especially important for women to understand the need to coordinate claiming of their Social Security benefits with their spouses so they can increase their spousal and survivor’s payments.
Create a Social Security longevity benefit to reflect Americans’ longer lives. Under this proposal, Social Security recipients over 80 or 85 would receive a benefits boost, like an extra 5 percent above their regular benefit. A woman reaching age 65 this year can expect to live until 85, on average, according to Social Security Administration data. But a quarter of today’s 65-year-olds are expected to live past 90; 10 percent will make it to at least 95.
Change the annual withdrawal rules for retirement plans. Today, you need to start taking minimum annual distributions when you turn 70½. But that mandatory age seems a little dated to me, since we’re living longer, healthier lives and many of us are working past 70. The retirement withdrawal rules are really geared to people retiring at the “traditional” age of 65. The longer your retirement stash can keep growing tax-deferred, the more you’ll have when you need the money.
GAO experts like this proposal for a different reason: It would become easier for retirees to buy so-called longevity annuities, contracts that pay guaranteed amounts regularly for the rest of your life but typically don't begin until you’re 85.
One Proposal I Didn't Like
And that takes me to the proposal that concerns me: Encourage the use of annuities in retirement plans.
The GAO report says that wider use of annuities could be especially attractive to women because of their longer life spans. Last year, the GAO released another report that delivered a similar message.
Here are the stumbling points for me. Annuities may be inappropriate or expensive for people with shorter-than-normal life expectancies. Likewise, the money you use to purchase immediate annuities is no longer available to cover large unplanned expenses, like medical bills.
What You Should Do Now
You can’t afford to wait for these proposals to take effect, if ever. That’s why I recommend you take steps to make retirement more secure:
- If you work for an employer with a 401(k) plan, sign up for it.
- If you are already enrolled in a 401(k), contribute more money to it. The maximum contribution is generally $17,000 in 2012, but if you’re over 50, you can contribute an additional $5,500 for a total of $22,500. In 2013, the 401(k) contribution limits will rise to $17,500 and $23,000.
- Look for ways to lower your retirement plan's fees. Do you know how much you’re paying in 401(k) expenses? Under new rules, employers are now providing fee information to employees (though deciphering the fees isn’t easy). You may want to switch or consolidate your 401(k) accounts to reduce your fees and increase the amount you can keep.
- Tap into an online calculator to see if your retirement is on track. I like The Ballpark E$timate from the Employee Benefit Research Institute; Next Avenue has a link to it. Once you know how you’re doing, you can take steps to try to make retirement less of a worry.