Three Financial Planning Opportunities for Women in 2021
Three Retirement Opportunities
My Mom taught me most of the essentials as I grew up. Like most mothers, her mission was to insure that I, as well as my brothers, adhered to the Golden Rule and progressed upon a path to independence as we reached adulthood. Mom would have been 85 years old next month year but she had to fight a tough battle with health issues and the health issues won. Her life was cut too short, but during her later retirement years, she taught me three financial pitfalls that all women should recognize; taxes can deplete your retirement funds quickly, the best insurance may not cover you when you need it, and a steady paycheck reduces stress. Here are three ways to address these issues.
Taxes Can Deplete Your Retirement Funds
Open a Roth IRA – A Roth IRA allows you to set aside and grow savings in an account which is not taxed when funds are with withdrawn. (Certain restrictions apply. Consult with your tax advisor.) This pool of “tax free” money can come in very handy when you require funds for an unanticipated expanse.
Mom wished she had Roth IRA funds when she needed to withdraw savings from her taxable accounts and traditional IRA to make some house repairs when Hurricane Sandy devastated the New Jersey Shore .
The IRA withdrawal caused her income to increase which resulted in her moving into a higher tax bracket and subjected a portion of her Social Security benefit to taxes. If she withdrew funds from a Roth IRA, there would be no impact on the remainder of her taxable income from other sources. She would have rather kept the money that she paid in taxes to go on a cruise.
Insurance May Not Cover Retirement Health Emergencies
Consider Long Term Care Insurance- The impact of healthcare costs in retirement cannot be understated. JP Morgan estimates that 7 out of 10 women over age 75 will require some type of long term care in their lifetime. They also estimate that Health Care inflation for the elderly is over 5% higher than normal measures for inflation.(1) These two factors taken together suggest that women need to plan for major health care expenses or risk financial hardship. Long Term care Insurance may reduce this risk.
There are several types of Long Term Care insurance that provide benefits for in home care and assisted living. My Dad was a military veteran so he and my Mom were entitled to excellent health care benefits during their retirement. When Dad passed away, these benefits continued for Mom. However, the health insurance did not cover in-home care as Mom’s health declined. Once again, she needed to withdraw additional funds from her traditional IRA to pay for the care. Once again, the tax man received a share of the funds. Long Term Care Insurance could have reduced out of pocket costs and, if properly structured, these benefits could have been received tax-free.
A Steady Paycheck Reduces Stress
Evaluate an Annuity for Income – Annuities were originally designed by insurance companies to provide a guaranteed stream of income to an individual, typically for the rest of their life. For a lump sum of money, the insurance company has a contractual obligation to pay the income on a periodic basis. Over time, these investment vehicles have morphed into a variety of types. However, the plain vanilla version operates very much like a pension in that you can receive a check monthly, quarterly, or yearly for the rest of your life despite what happens in the stock or bond markets each day.
Women run the risk of outliving their savings simply because life expectancy is increasing. If a woman is 65 today, she has over a 50% chance that she will live to 85 and a 33% chance that she will live to 90. (2) What if her retirement funds were suddenly reduced due to an unanticipated decline in the stock market or a large one-time expense?
Mom was lucky enough to receive monthly incomes from pensions so she didn’t necessarily need an income annuity. She didn’t need to worry about paying the monthly bills when the stock market collapsed in 2009. But she was from a generation where pensions were common. Today, you are lucky to have one. It may be prudent to determine if an annuity should fill your pension gap.
In conjunction with a trusted advisor, women need to assess the need for a variety of financial planning tools to help them achieve a comfortable retirement. They tend to have lower retirement fund balances then men due to lower salaries and employment gaps during childbearing years. However, there are solutions that may improve the odds that they offset these gaps and enjoy a financially secure future.
(1) BLS, as of December, 2011. Inflation: BLS, Consumer Price Index, J.P. Morgan Asset Management 2016 Guide to Retirement
(2) Social Security Administration, Period Life Table, 2011 (published in 2015), J.P. Morgan Asset Management 2016 Guide to Retirement
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Contributions to a Roth IRA are not tax deductible and there is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
In reference to general account obligations and guarantees, such as is present with fixed annuities, the ability for the insurance company to meet these obligations to policyholders are subject to sufficient capital, liquidity, cash flow and other resources of the insurance company. Tax services are not offered through, or supervised by Lincoln Investment, or Capital Analysts. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation