Gender Disparities in Retirement

Everywhere we turn, it seems, there’s an article or newscast about how women are at an economic disadvantage, especially regarding lower wages. Just imagine how much more women could contribute to economic growth if such disadvantages were eliminated.

But we want to work toward counteracting some of those challenges, particularly where retirement income planning is concerned. Even married couples with their retirement savings on track may not be aware of different scenarios that could potentially leave a widow with an income shortfall during her retirement years. We’re happy to review retirement income strategies for your household and make recommendations tailored for your financial situation; just give us a call.

In the meantime, let’s take a look at some of these gender disparities and how they can impact a woman’s personal financial future. For example, women tend to borrow more for college undergraduate student loans than men and take longer to pay them back.1

Presumably, one of the reasons it takes them longer to pay back student loans is that women, on average, tend to earn lower salaries than men. For example, in the United States, white women are paid about 76 cents on the dollar relative to white men.2 Black women receive only 67 cents per dollar.3 This may seem like a woman’s issue, but it’s not. In theory, the longer it takes to pay off student loan debt, the less women can save for retirement, and the less women save, the more reliant they might be on Social Security for retirement income. A demographic that relies heavily on Social Security for retirement income could potentially cause an increase in FICA taxes, which can affect everyone.

One of the ways working women can improve their retirement income situation is by working longer. There are several advantages to this. First, for women who take time out of the workforce for raising children and general caregiving, working longer provides more tax years from which the 35-year calculation for Social Security benefits is drawn.4 Second, women tend to live longer, so they could feasibly work until an older age.5 And finally, researchers have determined that the average woman who works to age 70, rather than retiring at 62, can increase her monthly Social Security check by 12 percent.6

Another area in which women can improve is financial literacy. In a recent study, 18 percent of women ages 60 to 74 passed a 38-question quiz on retirement income topics, compared with 35 percent of men the same age.7 Fortunately, this is an area in which any woman can take the initiative to pursue on her own. It doesn’t require wage legislation passed by Congress; salary negotiation skills with employers; or shortening the time spent out of the workforce for caregiving.

The more women can learn about retirement income planning, the better prepared they can be for their long-term financial future. Planning for retirement is a skill that we believe should not be delegated to fathers, husbands, boyfriends and male children. At the very least, it’s a shared responsibility — but be aware that chances are good a woman will be managing money on her own at some point during adulthood due to divorce or widowhood.8

Content prepared by Kara Stefan Communications.

1 Kim Blanton. Center for Retirement Research at Boston College. June 8, 2017. “Is There a Student Loan Gender Gap?” http://squaredawayblog.bc.edu/squared-away/is-there-a-student-loan-gender-gap/. Accessed July 31, 2017.

2 AAUW. Spring 2017. “The Simple Truth about the Gender Pay Gap.” http://www.aauw.org/research/the-simple-truth-about-the-gender-pay-gap/. Accessed July 31, 2017.

3 Casey Quinlan. ThinkProgress. July 31, 2017. “Black women’s ‘equal pay day’ reminds us how persistent the wage gap is.” https://thinkprogress.org/black-women-wage-gap-ca285791a371. Accessed July 31, 2017.

4 My Retirement Paycheck. National Endowment for Financial Education. 2017. “How are Social Security benefits calculated?” http://www.myretirementpaycheck.org/Social-Security/How-are-benefits-calculated. Accessed Aug. 7, 2017.

5 Social Security. “Calculators: Life Expectancy.” https://www.ssa.gov/planners/lifeexpectancy.html. Accessed Aug. 7, 2017.

6 Kim Blanton. Center for Retirement Research at Boston College. May 18, 2017. “Women Get a Bigger Social Security Bump.” http://squaredawayblog.bc.edu/squared-away/women-get-a-bigger-social-security-bump/. Accessed July 31, 2017.

7 Christopher Robbins. Financial Advisor. July 27, 2017. “4 Out Of 5 Older Women Flunk This Retirement Literacy Quiz.” http://www.fa-mag.com/news/4-out-of-5-older-women-flunk-this-retirement-literacy-quiz-33885.html?section=. Accessed July 31, 2017.

8 Susan L. Hickey. Newsmax. June 23, 2017. “Many Women Will Spend Their Later Years Alone; Are They Ready for That?” http://www.newsmax.com/Finance/Personal-Finance/older-women-alone-financially/2017/06/22/id/797691/. Accessed July 31, 2017.

We are able to provide you with information but not guidance or advice related to Social Security benefits. Our firm is not affiliated with the U.S. government or any governmental agency.

 We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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How Much Retirement Income Should Come From Savings?

According to the Bureau of Economic Analysis, Americans’ personal savings rates are about half of the amount they once were. For the past few years, the personal savings rate has hovered around 5 percent, but that’s still significantly lower than the savings rate from 1950-2000, which averaged 9.8 percent.1

For many retirees, a big concern during retirement is running out of money. So how can you help make your retirement savings last? We help clients create individual financial strategies using insurance and investment products — and the strategy isn’t the same for everyone. For some, it may be maintaining an annual withdrawal rate of between 4 to 5 percent from their investments.2 For others, it might make sense to consider working full-time longer, taking a part-time job during retirement or even repositioning a portion of assets into an annuity that can provide income guaranteed by the issuing insurance company.

However, each of these strategies comes with advantages and drawbacks that could affect long-term financial goals. That’s why we work closely with each client to customize a retirement income strategy based on their specific financial situation.

Fewer retirees have a pension plan to help fund their retirement, which can mean personal savings — ranging from an investment portfolio to IRAs to company 401(k) plans — may now be a primary source for retirement income.

Social Security provides 34 to 40 percent of retirement income for the average retiree,3 and that share is higher for elderly unmarried women; nearly half of this demographic relies on Social Security benefits to provide 90 percent or more of their income.4

The Center for Retirement Research at Boston College recently conducted a study to find out just how much Americans may need to rely on 401(k) plans for retirement income. Here are the results:5

  • Low-income households: 25%
  • Middle-income households: 32%
  • High-income homes: 47%

While those are general numbers, it’s important to point out that, overall, women are 80 percent more likely to live in poverty during retirement than men. There’s a big combination of factors that cause this, including lower pay, time out of the workforce for caregiving and the fact that women tend to live longer. Other ancillary variables can make the situation worse, such as divorce, loss of spouse and being forced to retire due to poor health.6

One way individuals are shoring up their savings is by working longer. If you plan to continue working full-time or part-time in retirement, you won’t be alone. As of May 2016, there are approximately 9 million U.S. employees who are 65 and older.7

Content prepared by Kara Stefan Communications

1 NerdWallet. Aug. 16, 2017. “Average American Saves Less Than 5%; See How You Stack Up.” https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/. Accessed Aug. 21, 2017.

2 Fidelity. June 5, 2017. “How can I make my savings last?” https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last. Accessed July 13, 2017.

3 American College of Financial Services. Dec. 28, 2016. “How much of your client’s retirement income should come from a 401(k)?” http://knowledge.theamericancollege.edu/blog/how-much-of-your-clients-retirement-income-should-be-from-a-401k. Accessed July 13, 2017.

4 Anna-Louise Jackson. NerdWallet. March 31, 2017. “3 Ways Women Can Bridge the Retirement Gap.” https://www.nerdwallet.com/blog/investing/3-ways-women-can-bridge-the-retirement-gap/?trk=nw-wire_305_375718_26766. Accessed July 13, 2017.

5 American College of Financial Services. Dec. 28, 2016. “How much of your client’s retirement income should come from a 401(k)?” http://knowledge.theamericancollege.edu/blog/how-much-of-your-clients-retirement-income-should-be-from-a-401k. Accessed July 13, 2017.

6 PBS Newshour. July 10, 2016. “Women more likely than men to face poverty during retirement”. http://www.pbs.org/newshour/rundown/women-more-likely-than-men-to-face-poverty-during-retirement/. Accessed August 21, 2017.

7 NerdWallet. Aug. 16, 2017. “Average American Saves Less Than 5%; See How You Stack Up.” https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/. Accessed Aug. 21, 2017.

Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs.

This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

 The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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What is a “safe” retirement withdrawal rate?

In an investment portfolio, the withdrawal rate is the monetary percentage from which a retiree draws from his account each year.  A “safe” withdrawal rate is a fixed percentage distributed as a systematic withdrawal that reasonably expects portfolio funds to last throughout the retiree’s lifetime. When determining your personal retirement withdrawal rate, it’s important to include adjustments for inflation and the portfolio’s ability to generate earnings throughout a specific time frame, ensuring the account isn’t entirely depleted.1

These are the basic parameters for calculating a “safe” withdrawal rate, but your specified rate can vary, depending on the total portfolio value, safeguards against market risk and inflation, living expense requirements and life expectancy. We’re here to help you determine your retirement withdrawal rate for your individual situation.

The “safe” withdrawal rate strategy was originally based on financial planner William Bengen’s research in the 1990s. At the time, a prevailing theory was if an investment portfolio generated an average annual return of 7 percent, then that was the percentage that could be withdrawn each year. However, Bengen introduced the “sequence of returns risk” concept, recognizing that an average annual return represents a series of higher and lower returns. If an individual experiences significantly low returns early in retirement, the portfolio would be too depleted to sustain a high withdrawal rate, even if that rate is justified by a higher average annual return during a 15-year time period. Bengen concluded at that time that 4 percent is generally considered a “safe” withdrawal rate.2

Other financial advisors assert that if the returns sequence is favorable in early retirement, retirees could theoretically be able to increase their spending rate. In some scenarios, the 4 percent rule could even double or triple a retiree’s wealth by the end of retirement because his conservative withdrawal rate would not spend the bulk of his portfolio gains during that time period.3

Another point to consider is that the original 4 percent guideline was based on retirees spending the same amount each year throughout retirement. However, recent research has shown that retirees tend to decrease spending as they get older. Based on this decreased spending premise, analysts have determined that the 4 percent rate could be underestimated by 0.32 to 0.75 percent. In other words, because spending tends to decrease throughout retirement, the “safe” withdrawal rate guideline may be closer to a 4.5 percent.4

When developing a retirement withdrawal rate, remember that an investment portfolio should be sufficiently diversified to allow for growth opportunity paired with risk-mitigation financial vehicles.5

 Content prepared by Kara Stefan Communications

1 Bogleheads.org. Jan. 10, 2017. “Safe Withdrawal Rates.” https://www.bogleheads.org/wiki/Safe_withdrawal_rates.

Accessed March 3, 2017.

2 Wade Pfau. Forbes. April 19, 2016. “The 4% Rule and The Search for a Safe Withdrawal Rate.” https://www.forbes.com/sites/wadepfau/2016/04/19/the-4-rule-and-the-search-for-a-safe-withdrawal-rate/#772ae67f5a10. Accessed March 3, 2017.

3 Michael Kitces. Nerd’s Eye View. June 3, 2015. “The Ratcheting Safe Withdrawal Rate – A More Dominant Version Of The 4% Rule?” https://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule/. Accessed March 3, 2017.

4 Derek Tharp. Nerd’s Eye View. Feb. 22, 2017. “The Impact of Decreasing Retirement Spending on Safe Withdrawal Rates.” https://www.kitces.com/blog/safe-withdrawal-rates-with-decreasing-retirement-spending/. Accessed March 3, 2017.

5 Fidelity. “Diversify Your Portfolio.” https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/diversify-your-portfolio. Accessed April 10, 2017.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Taxes and Retirement Planning

The White House recently introduced what it billed the “biggest tax cut” in U.S. history. While a presidential tax proposal is not likely to get passed without significant changes, the fact that Republicans dominate both chambers of Congress suggests 2017 may well be a year in which significant tax reform is engineered.1

One thing should be perfectly clear: The U.S. tax code is highly complicated.2 There may not be anyone who understands it all off the top of their head. CPAs and tax professionals must conduct thorough due diligence to tailor strategies and complete returns for taxpayers with complex situations.

Because of this, we recommend our clients who require tax advice work directly with an experienced and qualified tax professional. However, we also believe financial and tax professionals should not work in a vacuum, and therefore are more than happy to work in concert with our clients’ tax advisors to help align their financial strategy with their tax situation.

This is particularly important when it comes to retirement planning, because you want to save as much as possible before you retire, which may include tax-deferred financial vehicles such as a 401(k) or IRA, but you don’t want to get hit with a big tax bill on untaxed earnings once you’re in retirement.3 This is a delicate balance that requires experience and collaboration from both a financial professional and a tax professional.

One tax issue each of us deals with is the federal income tax rate. Our annual earnings determine which federal tax bracket we land in, but that tax bracket isn’t the tax rate applied to our entire income. Instead, we pay every tax rate on income blocks up to our individual bracket. Like many things about filing taxes, this can be highly confusing for many people.

It may be easier to understand this through a hypothetical example. Let’s say Joe, who is single, had $92,000 of taxable income in 2016, which landed him in the 28 percent tax bracket. This is how his total tax is calculated:4

  • He pays 10% on the first $9,275 (tax of $927.50)
  • He pays 15% on the next $28,375 (tax of $4,256.25)
  • He pays 25% on the next $53,500 (tax of $13,375)
  • He pays 28% on the final $850 (tax of $238)
  • Total tax bill of $18,796.75

As you can see, Joe doesn’t pay 28 percent on the full amount of his taxable income; his taxable amount progresses through each income bracket and their respective tax rates until it reaches his total taxable income for the year. Therefore, a person who falls in the highest tax bracket is only paying that higher tax rate on a portion of his or her income.

This is an important distinction to remember as the U.S. works toward tax reform. On one hand, reducing the number of tax rates from seven to three (Trump’s proposal: 10 percent, 25 percent, 35 percent)5 looks to simplify tax filings, but for many people, this could mean paying a higher tax rate on larger blocks of income. Let’s take the hypothetical example of Joe again, using the same income brackets (to date, no tax rate income brackets have been proposed). Here’s how Joe’s scenario might break down:

  • He pays 10% on the first $9,275 (tax of $927.50)
  • He pays 25% on the next $81,875 (tax of $20,468.75)
  • He pays 35% on the final $850 (tax of $297.50)
  • Total tax bill of $21,693.75

This example simply illustrates how a progressive income tax works. Obviously, it doesn’t take into consideration credits and deductions, which vary substantially among taxpayers. Nor does it include payroll taxes.6

Federal income brackets and their respective tax rates are the most fundamental issues Americans are subject to when filing taxes. But as you can see, there’s nothing straightforward about them. This is worth remembering as tax reforms continue to be proposed and debated moving forward: Nothing concerning taxes is simple, and there are usually layers that impact us that the average layperson isn’t likely to see.

Content prepared by Kara Stefan Communications

1 Fox News. April 26, 2017. “Mnuchin vows ‘biggest tax cut’ in US history, confirms plan to slash business rate.” http://www.foxnews.com/politics/2017/04/26/mnuchin-vows-biggest-tax-cut-in-us-history-confirms-plan-to-slash-corporate-rate.html. Accessed May 5, 2017.

2 Vanessa Williamson. The Atlantic. April 18, 2017. “How the Tax-Filing Process Confuses Americans about Tax Policy.” https://www.theatlantic.com/business/archive/2017/04/paying-taxes-confusion-policy-1040/523287/. Accessed May 5, 2017.

3 Fidelity. March 1, 2017. “How to invest tax efficiently.” https://www.fidelity.com/viewpoints/investing-ideas/tax-strategy. Accessed May 5, 2017.

4 Tina Orem. Nerd Wallet. Sept. 8, 2016. “2016 Federal Income Tax Brackets.” https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/. Accessed May 5, 2017.

5 Martha C. White. NBC News. May 2, 2017. “Even Families Making $100K Won’t Be Better Off Under New Tax Plan.” http://www.nbcnews.com/business/taxes/even-families-making-100k-won-t-be-better-under-new-n753941. Accessed May 5, 2017.

6 NPR. 2017. “On Tax Day, an Economist Outlines How the Payroll Tax Works.” http://nhpr.org/post/tax-day-economist-outlines-how-payroll-tax-works#stream/0. Accessed May 5, 2017.

These hypothetical examples are for illustrative purposes only. This information is not intended to provide tax advice. Be sure to speak with qualified professionals about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Savings and Investment Updates

The American College of Financial Services recently posted some surprising results from its Retirement Income Literacy Quiz. Nearly three-quarters of respondents ages 60 to 75 failed the test with a score of 60 percent or less.1

The quiz included topics such as which expenses are covered by Medicare and long-term care insurance and what age people should start drawing benefits from Social Security. If you’re not familiar with the answers to questions such as these, we invite you to schedule a consultation so we can help you delve into retirement planning. There are many factors to consider beyond where to invest and how much you’ve saved. Retirement is about preserving and distributing assets, as well as understanding the impact of longevity.

Let’s take a look at some other retirement-oriented questions that are important to answer. For example, do you know how long you have to work for your company before you can keep matched contributions to your 401(k) plan? Some companies that sponsor a 401(k) require employees to work around two to three years before employer-matching contributions are vested. If you leave the company before then, those matches won’t be added to your account balance — even if you maintain the plan with that employer after you go to work for another one.2

It’s worth noting that 401(k) and other employer-sponsored retirement plans may be considered for tax reform. Recent discussions have included eliminating the tax-deferred status of retirement plan contributions, which represent a four-year tab of $583.6 billion that Congress could spend elsewhere. The discussions are in the very early stages, but things can happen quickly in Washington these days, so it’s an issue worth watching.3

For those in the military, on Jan. 1, 2018, the military’s new Blended Retirement System goes into effect. Starting that day, all military personnel whose length of service spans one to 12 years will have one year to make an irrevocable choice between the old and new retirement plans. Service members who started before 2006 will automatically remain in the old plan, which offers a generous pension complete with inflation adjustments. However, anyone joining the military starting next year gets enrolled automatically in the new program, which combines reduced pension benefits with up to a 5 percent match of personal contributions to the government’s Thrift Savings Plan (TSP).4

If you haven’t saved enough money to retire yet, you may be thinking you’ll just keep working until you have enough. However, according to a recent survey of 1,002 retirees, 60 percent said the timing of their retirement was unexpected, citing reasons such as health issues, job loss or the need to care for a loved one.5 While working longer is a worthy goal, it’s good to develop a financial plan that helps provide for possible contingencies just in case you have to pivot to “Plan B.”

Content prepared by Kara Stefan Communications.

1 Walter Updegrave. Money. May 12, 2017. “Most Seniors Flunked a New Retirement Quiz. Could You Do Better?” http://time.com/money/4771461/retirement-quiz-pass-or-flunk/. Accessed May 12, 2017.

2 Emily Brandon. US News & World Report. May 8, 2017. “How Long Does It Take to Vest in a 401(k) Plan?” http://money.usnews.com/money/retirement/401ks/articles/2017-05-08/how-long-does-it-take-to-vest-in-a-401-k-plan. Accessed May 12, 2017.

3 Suzanne Woolley. Bloomberg. May 3, 2017. “What Is Washington Doing to My 401(k) Tax Break?” https://www.bloomberg.com/news/articles/2017-05-03/what-is-washington-doing-to-my-401-k-tax-break. Accessed May 12, 2017.

4 Dan Kadlec. Money. May 10, 2017. “What U.S. Military Need to Know About Their New Retirement Plan.”  http://time.com/money/4767777/military-blended-retirement-system-tips-new-calculator/. Accessed May 12, 2017.

5 Charisse Jones. USA Today. June 2, 2015. “60% of Americans Have to Retire Sooner Than They’d Planned.” https://www.usatoday.com/story/money/2015/06/02/majority-of-americans-have-to-retire-sooner-than-theyd-planned/28371099/. Accessed June 2, 2017.

Our firm is not affiliated with the U.S. government or any governmental agency and does not provide federal benefits advice.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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