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Strategies for Women to Bridge a Retirement Shortfall

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Many women are playing catch-up with their retirement savings. Joining me to discuss some strategies to help women bridge the retirement funding shortfall is Nancy Coutu. She is a principal with Money Managers Limited in the Chicago suburbs.

Nancy, thank you so much for being here.

Nancy Coutu: Thank you for having me, Christine.

Benz: You focus a lot on educating women about investing. Let's start by talking about some of the challenges that women face as investors. What makes them different from their male counterparts? There's a lot that's the same, but let's talk about some of the key challenges and what makes them different.

Coutu: Well, for one thing, women make $0.77 on the $1 that the man makes. So, right out of the box, she is making less money, which means she will have less benefits, which means she has less to save and also, she is going to live longer. She has got a combination of factors that has to be addressed personally to her.

Benz: I want to talk about when you are meeting with women, and you advise clients on their portfolios and on their investment programs, if you sit down with a woman and say, she is looking at her retirement plan and she is undersaved related to where she should be at that life stage, how would you suggest that she make up the shortfall? Let's think of maybe a woman in her 50s. What are some of the key levers that she can pull at that life stage?

Coutu: That's more common than you would think, because women were caregivers. A woman will start work, then she will stop to raise her children, then she goes back to work, then she is maybe staying home or taking off time to care for parents or an ailing spouse. As a result, she has not had a lot of time and extra resources to save. She is kind of behind often.

And if she has got a 10-year window, there's a lot of things that can really be done. It starts with, you've got to itemize what is the cost of living right now. As a certified financial planner my responsibility is to first go through her expenses. What is it  costing? I split expenses between required and desired. First, it's how much do we need to meet the required expenses--mortgage, real estate taxes, insurance, food--and then what does she want retirement to look like? Does she want to stay in her home? Does she want to move somewhere else? If she moves, is it going to be more expensive, less expensive lifestyle?

What types of things does she desire to do in retirement? Again, is it travel, is it helping her children financially, maybe grandchildren with college? We go through all of what she wants retirement to look like and then we go back to what are her resources: How much she is making right now versus her expenses? Is there a little extra there that she could be saving and we allocate that to savings, sometimes more aggressive savings at this point because we only have 10 years. Also, she needs to know how is she allocated. Women tend to be more conservative investors than men. They might have had and/or they are way lopsided. They either have it all at risk or none at risk. You need a balance, and it's about looking at the allocation and making recommendations on that. Under our new tax reform, there's really an opportunity here; 90% of the population will have a tax decrease this year. It's about going back and looking at what her withholding is set up at work and if she could change that to get a couple of hundred dollars more a month in cash flow, ultimately to save that money. That's our starting point.

Benz: To step up savings. You mentioned the asset allocation question. If you were to look at it in a vacuum without any behavioral factors in the mix, you might think, well, longer life expectancy, that might call for a higher weighting in stocks. Would you say that you do tend to recommend higher equity weightings for women than their male counterparts or does it completely depend?

Coutu: It has nothing to do at that point with sex; it has to do with time and your competency in investing. The most important is, I use the rule of 100. So, male/female doesn't make any difference: It's 100 minus your age. The difference is the maximum you should have exposed to risk. Risk is something going up and down. It could be a bond portfolio. People perceive that as safe and it's not. A stock portfolio, and most people in their 401(k) today because the plan doesn't have anything that's safer to invest in, it's 100% exposed to risk. Sometimes that's our starting point. I'll look at her 401(k) statement and see on a scale from 1 to 10, she is a 2 in terms of conservative, but she has 100% of her retirement savings at risk. It's about balancing that. It's 100 minus your age. The difference is the maximum at risk. If she is 50 years old, the maximum should be 50% at risk. And if it's 90%, we have some work to do to balance that out.

Benz: You mentioned though, bonds, bond funds. We have potentially some potential for principal-related volatility, some risk there as well. How do you sort of navigate that situation, the fact that we have rising interest rates that are putting some downward pressure on bond prices?

Coutu: Again, we first start with the balance formula, the 100 minus the age. But then, we go outside of the plan, because the plan itself won't have anything other than bond funds that will be volatile. There might be other investments they need to look at outside of the plan that have fixed rates of return that can't go down in a bad market, because you did safety in that portfolio. Safer investments don't go down in value. They can only go up. And there are several. The interest rates, of course, are fixed and as a result lower potential to make long-term money, but they also have a potential to never go down. And the next best thing to making money is not losing it.

Benz: What are you talking about in that category? Are you talking about cash or stable value or …?

Coutu: It could be cash, it could be money markets, it could be long-term Treasuries, individual Treasuries as opposed to a bond fund. It could be fixed annuities, fixed index annuities. Not variables, because variables you are back in the market. But certainly, things that are conservative in structure will give you a better than average rate of return if it was left in money market and ideally no fees, no management fees.

Benz: We talked about looking at the budget, making sure that the savings rate is adequate. We talked about asset allocation. Let's talk about Social Security planning and what kind of counsel you give women on timing their Social Security claiming decisions? Does that greater longevity call for postponing Social Security filing? Or how do you come down on that question?

Coutu: We can strategize around Social Security in a variety of different ways, which is a good thing. Number-one is, if she is single, was she married? If she was married and if she was married for 10 years or longer to the person, whether they are alive or deceased, she has a right to claim his Social Security benefit which she will get half of it, but she can take, as a strategy, she can take half of his, postpone taking her own benefit, let her own benefit accumulate after her full retirement age, so it's compounding at 8% a year at least. Then switching from the spousal benefit over to her own benefit at age 70. So, she ultimately ends up with substantially more in payout than she would have if she had to take her own, either early, before her full retirement age or at retirement age. That's one example. A lot of people don't know that.

There's also a widow's benefit you can do the same with; you can take your widow's half benefit and then switch to your own later on. But it's strategizing. Of course, maybe you have to work longer to get a bigger benefit. A lot of times again, women don't even have their 40 quarters in because they were off and on work.

Benz: Right. That working longer issue has, kind of, bubbled up. People see it as a powerful lever for making up for retirement planning shortfalls. Do you encounter clients who intend to work longer, and are they successful in being able to do that? Or again, does it completely depend?

Coutu: A lot of people are going back to work. A lot of people left work, they found they couldn't fill their day with enough activities and are going back to work. Also, it's kind of interesting, the demographics of the workforce. Employers are starting to look for baby boomers to employ instead of maybe the younger generation coming out of college. There are new and different opportunities for someone 50 and older now that weren't there even 10 years ago. That's kind of exciting.

Benz: Finally, let's talk about long-term care planning, because you mentioned, Nancy that women tend to be caregivers oftentimes for parents and then perhaps their spouses. But if their husband predeceases them, there is no one to care for them oftentimes. How do you counsel clients on approaching the long-term care decision? Obviously, there are a lot of factors here. We've seen long-term care premiums go through the roof over the past decade. How do you encourage women or counsel women on navigating this space?

Coutu: Women are going to live longer. And because they were caregivers, it could have also affected their health. Yheir chance of becoming debilitated whereby they can't do two or more of their daily activities is far greater, actually, a risk than a man because of that caregiving background and what it's done to their health personally. A woman should know that ahead of time, that they are a bigger risk and of course, because they are going to live longer. A lot of times women think, well, my children will take care of me. Men think this, too. Yes, it would be wonderful if your children step in, but you want them to do the fun things for you. You don't want them to do the really nasty jobs.

Benz: Or have trouble in their own careers because they are taking time out to care for you.

Coutu: Exactly. And of course, jeopardizing their health and of course, their future. But it's about buying long-term care insurance, which is getting, as you mentioned, more challenging every day. There are also investments now, latest-generation investments that have long-term care features to them. It's becoming more and more prevalent. There's 10,000 people a day turning 65. It's a potential crisis in our country. Statistics are, 1 out of every 2 people over 65 are in need of sort of long-term care. When it's a woman who is going to live maybe a long time not with quality of life, but she still needs shelter and food, she needs someone to take care of her and she should have a strategy in place for that.

Benz: When you talk about new investments products coming online, are you talking about the hybrid products?

Coutu: Yeah. Well, there's hybrid long-term care policies, but there's also investments that have attached to it features that if you were in need of long-term care, your income, for example, would be enhanced or the lump sum value would be enhanced. It's getting more and more exciting.

Benz: Nancy, really helpful overview of some strategies that women can use to bridge retirement shortfalls. Thank you so much for being here.

Coutu: Thank you, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.