The Stakes Are Even Higher When Planning For Women. Here's What You Can Do
Wednesday, July 9, 2014 • 3:23pm
Are you a single woman (widowed, divorced or never married)? If so, your financial planning needs are greater than the average couple or single man. Why? You will live longer than the average man but you typically have less money to do so. In other words, you have “longevity risk.” What can you do about it?
First of all, women – on average – are more receptive to professional advice than men. This is positive since professional guidance from an objective financial planner can brighten your financial prospects immeasurably. To begin this process, have a full financial health assessment that looks at your investments, cost of financial goals, insurance, tax minimization strategies and estate planning. Armed with information, your planner can deploy tools to reduce your longevity risk - even if you face your own spiraling medical/health care costs, financial support requests from aging parents and (for some) financial support requests from adult children/grandchildren.
The best defense is an offense. Here are 4 ideas to consider:
1. Consider deferred fixed annuity options when interest rates are higher. A deferred fixed annuity involves putting money down now and receiving it back at a later date in the form of a monthly stream of returned principal and interest for the rest of your life. Your fixed annuity locks in a certain interest rate so these annuities become more attractive when interest rates are higher.
Here’s an example: Lauren is a single, 57 year old professional. Her parents are long-lived. Her financial planner is concerned about Lauren outliving her assets if she lives past 85 (longevity risk).The advisor will monitor interest rates and advise Lauren to purchase a deferred fixed annuity in approx. 3 years -- when interest rates are expected to be higher. Lauren’s advisor calculates what Lauren can afford to put down at that time to receive a stream of income in the future.
It’s now 2017, and Lauren is ready to invest 250K in a deferred fixed annuity that will begin to pay her a steady stream of income when she turns 80 in 2037. Lauren’s 250K represents less than 20% of her investment assets, so she retains a good degree of liquidity. (note: I am simplifying the planning process). Although it costs more, Lauren elects to purchase a deferred indexed fixed annuity so her future payment, from age 80 onwards, will increase with inflation.
I’m recommending fixed annuities and not variable annuities. I’ve written critical pieces about the excessive sale of variable annuities to uncomprehending clients who do not necessarily need them. This issue will continue as long as salespeople remain incentivized to sell variable annuities for high commissions. However, fixed annuities are a different animal; Lauren’s future annuity may become an important income stream to her after she turns 80 – at a time when her investment assets are projected to decline. Essentially, Lauren is betting she will live long past the actuarial average and will “win” in terms of receiving an income stream for life. (Conversely, the insurance underwriter is betting Lauren will live fewer years).
An additional point about Lauren’s fixed indexed annuity is that it will become her second annuity – not her first. Her first annuity? Social Security. Like Lauren’s deferred fixed annuity, Social Security pays an indexed fixed stream of income for life. Lauren’s advisor analyzed various scenarios and concluded Lauren should wait until she turns 70 to receive the maximum Social Security benefit. Taking Social Security later is another strategy to counteract “longevity risk.”
The government is getting on board with the idea of annuities in 401(k) or IRA plans. Under new US Treasury Department rules, individuals could use up to 25% of their account balance (up to 125K) to purchase deferred annuities. Final rules proposed in 2012 allow for the return of premiums as a death benefit if an individual dies before receiving the stream of income.
2. Is your advisor creating a plan that assumes you live to 95 – or beyond? Lauren is 57. If her advisor assumes she lives to 95 (at the minimum), Lauren needs a financial plan and portfolio that will adjust to her needs over nearly 40 years. Lauren may need to retain a reasonable (40-60%) exposure to stocks into her 70s and not retreat too quickly to an excessively conservative portfolio. Stocks – while volatile – have the potential to deliver returns that outpace inflation. Bonds typically do not – although they provide a critical income-generating anchor in a portfolio and help lower overall portfolio risk. (note: I’m simplifying this topic in order to make a general point about longevity risk and portfolio structure).
3. Move somewhere less expensive. If you live an expensive part of the US, it may make sense to spend your last decades in a less expensive part of the country (or even outside the US – if you and your advisor have done your homework). I only recommend this strategy to my clients if it’s critical to their plan and they have other reasons to consider a move anyway: be near family/friends or pursue a hobby or interest. One great way to test this proposition is to select a handful of locations and stay there on your vacations. Lauren has family and friends in Western Pennsylvania so this remains an option down the road.
4. Consider an emergency financial planning “parachute”: a Reverse Mortgage. Reverse Mortgages are not for everyone but they offer a life line if the bulk of your net worth is locked up in your home. If you own a home that you safely can age into, a Reverse Mortgage may reduce longevity risk by tapping your home equity and converting it to an annuity stream for life – as long as you remain in your home. An alternative structure is to finance your last home with a Reverse Mortgage – you put down a portion of the home cost and never make mortgage payments. Both strategies work as long as you physically remain in your home.
Eve Kaplan is a Fee-Only (no products sold) Certified Financial Planner® Practitioner with 30+ years of investment/planning experience. Kaplan Financial Advisors upholds the highest fiduciary standards in the planning industry. Eve opened Kaplan Financial Advisors 11 years ago to provide comprehensive financial planning and investment management services to single women and couples. Eve can be reached at 908-898-0549 or Eve@KaplanFinancialAdvisors.com. Visit her website at www.KaplanFinancialAdvisors.com
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