Women and Financial Planning

Posted June 6, 2012 by thomas

Ok, 95 percent of financial planning is precisely the same for women as it is for men. But the 5 percent that is different for women is pretty important! Here is an overview of the aspects of financial planning that women, especially, should keep in mind. And we’ll look at each in more depth in future articles.

Longevity risk. Things are rapidly changing for the younger generation. Women are attending universities more than men are, these days, and those who have chosen careers have generally attained income parity with men their age. However, there’s a lot of catching up to do. The fact remains that women have historically earned less than men in the work force for a variety of reasons – and yet they have longer life expectancies.

This means that unless they get substantial help from husbands and other family members, women have to make their retirement savings last longer, on average, than men. Conversely, women have a higher risk of running out of savings towards the end of their lives than men do – and have a higher risk of spending many more years in assisted living facilities and nursing homes.

There are no magic bullets for this: Women have to be even more savvy savers and investors than men are, for this reason.

Women also tend to be more conservative in their investing than men. While men tend to be willing to take big risks in pursuit of big rewards, studies show that women are more inclined to seek modest returns, safety and security.

This is very wise of them – safety is important, and men tend to underestimate the risks involved in their investment decisions.  But it also means that in the aggregate, women must save a higher percentage of their savings. It just takes longer to build up a $1 million dollar nest egg saving at a 5 percent rate of return than it does at a riskier 8 percent.

The basic advice we always give, then – stay out of credit card trouble, live on less than you make, buy a reasonably priced home you can afford, maximize your tax-advantaged savings vehicles such as 401(k)s, 403(b)s and IRAs, is even more important for women.

Insurance

One place where women do get a break is on buying life insurance. Their longer life expectancies translates to lower premiums than men – all other things being equal. On the other hand, women may receive lower payouts on lifetime income annuities than men – for the exact same reason.

One technique we may consider is to steer life insurance to companies that publish separate rate tables for men and women, while routing annuity business to companies with joint tables – though for married women, we just use joint life expectancy tables for annuities and it works out just fine.

For medical insurance, a lot depends on your jurisdiction. Some states require all carriers to cover maternity benefits, while in other areas, you have to buy a separate rider for routine maternity care. Pretty much all plans will cover extraordinary medical events arising from pregnancy, such as ectopic pregnancies or other emergency conditions or conditions that present a clear medical problem or life-threatening problem for an expecting mother, requiring extraordinary treatment over and above routine maternity care and delivery.

Just be sure you understand what your plan covers. And if you are planning to have a baby, it generally makes sense to purchase a rider, if your plan doesn’t cover it.

Jurisdictions also vary concerning fertility treatments. Some states require plans to cover it, and in other states you need to shop around.

Social Security

The thing to remember about Social Security is that you have to be married at least ten years to qualify for spousal benefits. So if you’ve been a stay-at-home spouse for 8 years, and the marriage is in trouble, but you haven’t been working, you’re in a tough spot when it comes to social security. If you stay married for at least ten years, you are entitled to a portion of the Social Security benefits your husband earned while working during your marriage. Here’s the Social Security Administration page on Social Security for women, including divorcees, widows, parents, retirees, etc.

Long Term Care Insurance

This is a critical issue for women. Traditionally, women have married older men, and have been around to care for their older husbands in their declining years. But modern medicine is enabling many women to live well beyond their husbands. Modern economies are causing adult children to live far away from aging parents. The traditional family support systems for older women have eroded. Meanwhile, the cost of long term care can be devastating to a widow’s pension and retirement savings. The cost of a full-time nursing home facility can exceed $80,000 per year, and more in some areas. This is where long term care insurance important.

Medicare doesn’t provide more than a token long term care benefit. Medicaid may, but you may have to spend everything you have down to your last $2,000 or so in the world first. Some states exempt certain items.

Long term care insurance is definitely something to consider. Depending on the policy, it pays the costs of home care, adult day care, assisted living facilities, nursing homes and even hospice care. It protects you from having to sign over your family home to Medicaid authorities at the end of your life. It protects your pension income from having to go to the nursing home, and it protects your savings for you.

Some states, including Oregon, have long-term care partnership programs. You buy, say, $200,000 in lifetime long term care insurance benefits, and the state will exempt that much in assets before you are allowed to qualify for Medicaid. It’s a win-win. But long term care insurance may not make sense for the very wealthy, who can self-insure and who are unlikely to need to rely on Medicaid. It also may not make much sense for poorer women, who are likely to be Medicaid recipients regardless, and who need the money they would spend on long term care premiums just to have some retirement income.

On the other hand, it doesn’t make sense to save and save and save all your life – only to have to spend everything you saved on long term care. It’s a very individual decision, and it’s a conversation worth having with a planner.

Divorce Considerations

I hate it that some of our clients go through, or have gone through, this painful process – even when it’s best in the long run. One of the most common mistakes women make, though, is staying in the same unaffordable house for the sake of the children. If you can’t afford the house you’re in, it’s time to accept the inevitable and move on. If the house prevents you from saving your own money, if it causes you to put off saving for your childrens’ education, if it prevents you from forming an emergency fund, or you’re relying on credit cards to pay the grocery bill, then you’ve got too much house. If possible, it’s time to downsize to something you can afford while you get your start as a newly single woman.

The kids will be ok. In fact, they’ll probably be better off, in the long run.

You also need to do a careful debt inventory, as well, prior to getting divorced. It’s no fun getting blindsided by a debt that you forgot about, but you and your husband entered into jointly.

The other thing is to make sure you keep life insurance in place in the event of a divorce. Your marriage may go away, but if you have children, your insurable interest in your spouse doesn’t go away. If you are relying on alimony or child support payments from your ex, you should also look at owning a life insurance policy on him to protect you and your children from financial hardship if something should happen to him. Likewise, if you are taking care of the children, you may want to have a life insurance policy on you to help your ex provide for the children if something happens to you.

These are just a few of the things we look at with our women clients. We enjoy working with women of all ages, both single and married and everywhere in between.

2 Comments

• By Nancy Yuill, July 6, 2012 @ 3:12 pm

  Thanks Thomas, this is a really clear, honest and straightforward discussion of what women need to think about when it comes to financial planning.

• By thomas, July 6, 2012 @ 3:21 pm

  Thanks Nancy – I appreciate your comment.

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