5 Cures for Women's Retirement-Spending Paralysis
Fear of the unknown can make you leery of tapping your savings in your 50s and 60s. Here's how to feel more relaxed about opening your purse.
Kerry Hannon has covered personal finance for Forbes, Money, U.S. News & World Report and USA Today for nearly three decades. She's the author of Love Your Job: The New Rules for Career Happiness; What's Next? Follow Your Passion and Find Your Dream Job; Great Jobs for Everyone 50+ and Suddenly Single: Money Skills for Divorcees and Widows. Her website is kerryhannon.com. Follow her on Twitter @kerryhannon.
Many women, however, are loath to open their purses, particularly if they’re retired or nearing retirement. The Squared Away blog from the Center for Retirement Research at Boston College recently called this phenomenon “retiree paralysis.”
This paralysis is real. I remember my mother-in-law, who was widowed, wanting to buy a new car after her set of wheels needed a major repair. She called her financial adviser in a panic to see if she had enough money to pay for one. She did. But she was frightened to spend the money for fear she’d be tapped out if she ever needed cash for medical reasons.
(MORE: No Woman Retires Elegantly)
At the time, I thought she was being a little neurotic.
But this anxiety about holding off spending due to retirement worries hit my radar again recently when I was having dinner with a friend who’s a financial adviser at Morgan Stanley in Leesburg, Va.
She told me that her female clients in their 60s and 70s only wanted her help to keep their money “safe” so they’d avoid running out of dough. They had no interest in investing strategies. “Conservative is a mild way to describe their attitude,” she said.
And, she added, their phone calls asking which funds to tap to pay for expenses are always fraught with emotion. “You might call them hoarders,” she said.
What Women Are Afraid Of
What are these women really afraid of? The unknown, I believe.
When you’re in retirement or near it, it’s hard to know exactly how much you can spend and how swiftly. After all, who can predict how long you’ll live and what your health will be like in the future?
(MORE: 5 Expenses to Ditch in Retirement)
“Paralysis comes when one is facing too many unknowns at once,” says Christine S. Fahlund, a senior financial planner at T. Rowe Price Investment Services in Baltimore. “Alvin Toffler wrote a book years ago called Future Shock, in which he described what happens to us when we are overcome by having too many choices and new actions to take. That’s exactly what can happen in retirement.”
Contributing to the paralysis: Some of the old rules of thumb for retirement planning don’t hold up anymore.
For instance, financial planners traditionally recommended withdrawing 4.5 percent from your savings each year in retirement, adjusted for inflation, to help avoid outliving your money. Not anymore.
As ING Financial Partners retirement coach Larry Rosenthal wrote in an earlier Next Avenue post (“How Much to Withdraw From Retirement Savings”), “This simple one-size-fits-all plan may be off the mark for many retirees these days.”
I asked Fahlund and a few other financial planners how women could overcome their retirement spending paralysis. Here are their five tips:
1. Estimate what your financial future in retirement is likely to look like. “You must get educated about your unique situation,” Fahlund says.
T. Rowe Price has a free tool on its website, for example, where you plug in some numbers and can then learn how much you’re likely to be able to spend in retirement.
If the number seems low, you might look for ways to free up more money, such as altering the asset allocation of your portfolio, delaying retirement and claiming Social Security earlier.
2. Be practical – not emotional – about investing. Don’t be afraid of owning stocks or equity mutual funds after you stop working, Fahlund says. Stocks provide the growth opportunities that you’ll need over what could be decades in retirement.
(MORE: The Secrets of ‘How to Retire Happy’)
“Compare the emotional experience of a knot in your stomach when your portfolio balance goes down temporarily with the shock of running out of money and having to live solely off of Social Security and a pension,” Fahlund says. “I can tell you which of the two experiences I’d choose.”
Generally speaking, at 65, you should keep 40 to 60 percent of your mutual fund money in stock funds and the rest in bond funds, money market funds and the like.
Gradually, you can reduce your stock-fund allocation, but you’ll always want to have some money in the market since stocks have outperformed bonds historically.
3. Consider buying long-term care insurance. Health care costs can be the biggest wildcard for retirees, says Emily Sanders, an Atlanta-based managing director at the United Capital private wealth-counseling firm. So purchasing a long-term care policy can help provide peace of mind.
“With life expectancy getting increasingly longer for women — living to age 95 is not unusual — I recommend long-term care insurance for those who can afford the premiums and are eligible,” she says.
4. Map out a smart Social Security claiming strategy. Social Security can be a critical part of your retirement income, so maximizing benefits is critical.
Your Social Security check grows by 8 percent annually for every year you delay claiming benefits between your "full retirement age" (between 66 and 67 for people born after 1943) and age 70; your benefits are cut if you start taking Social Security between age 62 and your full retirement age.
Generally speaking, women without major health risks should postpone collecting Social Security for as long as they can, up to age 70, to ensure they’ll get the largest benefit possible, advises Lauren Locker, a certified financial planner with Locker Financial Services in Little Falls, N.J.
“Women should think of Social Security as the ultimate annuity product for ensuring a steady income source going forward into older age,” she notes.
5. Ponder a relocation in retirement to reduce your housing costs. Boomer women should explore downsizing by moving to a less expensive area or entering into a shared living arrangement with family or friends, Locker recommends.
And One Suggestion From Me
Let me close with a tip of my own: If you’ve got a bad case of retirement spending paralysis, I suggest working with a financial adviser who can cure you.
By combining forces, the two of you can figure out the best ways to anticipate what might be coming your way so you can avoid “future shock” and live a little.