Single women in their 40s are a diverse group. You may be a lifelong single, divorced, or widowed; childless, raising small children, or the mother of kids who are grown or nearly so; and responsible for aging parents or various other family members. Whatever your circumstances, it’s likely that you face myriad demands on your time and resources. But the good news is that this is potentially your highest-earning period.
With so many priorities competing for your attention, retirement planning can often get overlooked—but is essential. Financial research and consulting organization LIMRA found that 32% of women have done no retirement planning1 and that two-thirds of people who earn between $40,000 and $99,999 are saving less than 5% of their income for retirement, while one-fourth are saving nothing at all.2
For single women relying on one income to support themselves, and possibly others, earmarking money for retirement may seem overwhelming. Also, with retirement a few decades away, you may feel like there’s time to think about planning tomorrow. However, saving and investing now for your retirement is an important way to help ensure financial security and independence later in life. Here are some of the smartest moves to make now.
Start it up. Don’t let fear, embarrassment or procrastination keep you from planning for a more secure retirement. The sooner you get started with a saving and investing plan, the sooner you’ll ditch those nagging concerns about supporting yourself in your later years and be on the road to funding your retirement.
Get frugal. It may have seemed harmless to play fast and loose with your budget, but now it’s time to get serious about saving and investing. Create a budget with all of your monthly expenses—including some line items for fun—and stick to it. Record deposits into your savings account and retirement contributions and pay them like you pay your bills.
Claim your match. If your employer offers a retirement plan with a matching funds program, ignoring that opportunity is like giving up part of your paycheck. At a minimum, participate in the plan to maximize the matching funds you’re being offered. While doing so means you’re getting extra compensation just to save, not everyone does: Among women who are full-time, full-year wage and salary workers age 45 to 54, only 48.8% participate in a retirement plan, according to a 2011 report from the Employee Benefit Research Institute (EBRI).3
Do your paperwork. No one likes to think about wills and health care directives, especially in the prime of life. However, getting these documents finalized now is essential to ensuring that your wishes are honored under any circumstances. Consult an attorney to complete your will and health care directives, as well as to determine who will receive the power of attorney in the event you are unable to make decisions for yourself.
Open a ROTH IRA. A ROTH IRA allows you to make investments with after-tax income. The returns from those investments grow tax-free and the withdrawals you make are also not taxable as long as the account has been open for at least five years. You can convert your Traditional IRA to a ROTH, but keep in mind that you’ll need to pay tax on the contributions you previously deducted, as well as on any accumulated earnings, so it’s important to consult your financial advisor to determine the best course of action for your situation. TIAA-CREF also offers a calculator to help you determine the cost of conversion. The maximum contribution to a ROTH IRA in 2012 is $5,000 ($6,000 if you’re age 50 or older). In 2013, that maximum increases to $5,500 ($6,500 if you’re age 50 or older).4 Bear in mind that there are restrictions on who can contribute to a ROTH IRA, based on income.5
Diversify your portfolio. Once you’ve maximized your employer match and contributed the maximum to a ROTH IRA, work on building a portfolio that includes a mix of taxable and nontaxable investment vehicles. This will hedge against shifting tax rates and inflation.6 These may include mutual funds, stocks, bonds, annuities, or other options. It’s important to consult an experienced and reputable financial advisor as you build your portfolio to help ensure that you’re making the best decisions for your situation and enjoying the best possible tax advantages both now and in the future.
Make retirement saving sacred. Whether you head a household of one or many, taking care of your retirement needs must remain at the core of your financial management, even when children, aging parents, dependents or obligations make demands on your income. Social Security simply isn’t going to be enough. In mid-2012, the average monthly benefit to retirees was only $1,234, or $14,808 per year.7 The 2012 poverty level for a one-person household is slightly more than $11,000.8 College savings might seem more important, but education can be funded by loans and scholarships—an option not available for living expenses during retirement. Consider giving your student responsibility for funding part of his or her education, relieving some of the burden on you and freeing up funds for long-term investment. As an added bonus, making students responsible for a portion of their own education may make them reconsider sleeping through that 8 a.m. class!
Manage lump-sum windfalls wisely. During this stage of life, you might find yourself receiving a lump-sum inheritance, financial gift, work-related bonus, or even a sizable tax refund. Whenever such a lump sum arrives, resist the temptation to splurge before you’ve considered the best way to use that money. Catching up on retirement contributions, paying down debt, and investing for education or other goals can make you much happier in the long term than a new car or flat-screen television.
Title your assets properly. As you accumulate assets, it’s important to protect them. Asset protection tools such as trusts may shield investments from potential loss, ensuring that they remain ready to support the people or entities you designate. Other types of asset titling, a critical yet often-overlooked component of estate planning, determines creditor rights, how property can be disposed of during your lifetime, ownership rights upon your death and how income and income taxes are apportioned among property owners. It’s a good idea to consult with your financial advisor about the best solutions for your situation.
Protect your assets and dependents. Your ability to earn is your biggest financial asset, and provides income for you and your dependents to live. However, according to the Social Security Administration, workers over the age of 20 have a three-in-ten chance of being incapacitated before retirement age.9 Conduct life, property, and disability insurance check-ups on an annual basis to help protect yourself and your loved ones from financial losses and also to be sure you’re not over-insured. Once your assets exceed coverage thresholds of your homeowners or renter policy or automobile insurance, it might be a good idea to invest in an umbrella liability policy to shield your assets from potential loss from an accident or other unfortunate circumstances.
Buy the right real estate. Single women are buying real estate at record levels. The combination of affordable properties and low interest rates might mean it’s a good time to invest in a home. Be sure you buy a property you can afford over the long term and have backup savings and disability insurance to provide mortgage payment money if you lose your job or experience a temporary inability to work.
You’re in charge of your own life, but you’ve also got a slew of obligations at this stage of life. Keeping your retirement vision front and center in your financial plan is as important as protecting yourself, your loved ones and your assets. Don’t lose focus on the long-term goal of living comfortably in retirement.
Where does the money go?
It can be useful to see how other people spend their money and check out how your spending stacks up. This chart shows typical spending for U.S. consumers in 2011.10
1 One-third of U.S. Women Have Not Completed Basic Retirement Planning, LIMRA, October 2012 http://www.limra.com/newscenter/newsarchive/archivedetails.aspx?prid=267
2 Most Middle-Income Workers Saving Less Than Five Percent of Their Income for Retirement, LIMRA, October 2012 http://www.limra.com/newscenter/newsarchive/archivedetails.aspx?prid=269
3 Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2010, Craig Copeland, Employee Benefit Research Institute, October 2011, p. 11 http://www.ebri.org/pdf/briefspdf/EBRI_IB_10-2011_No363_Ret_Part.pdf
4 Retirement Topics – IRA Contribution Limits, Internal Revenue Service, Last updated November 2012 http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits
5 Withdrawal of earnings from a Roth IRA prior to age 59½ may be subject to an additional 10% penalty.
6 Please note that diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss.
7 Social Security Basic Facts, Social Security Administration, July 2012 http://www.ssa.gov/pressoffice/basicfact.htm
8 2012 HHS Poverty Guidelines, Department of Health and Human Services, January 2012, http://aspe.hhs.gov/poverty/12poverty.shtml
9 Disability Benefits, Social Security Administration, June 2012, http://www.ssa.gov/pubs/10029.pdf
10 Consumer Spending 2011 News Release, Bureau of Labor Statistics, September 2012 http://www.bls.gov/news.release/pdf/cesan.pdf
While it is not our purpose or intent to provide specific investment advice or financial planning services, the above information may be helpful in understanding how to stay focused on long-term financial goals. We urge you to seek advice based on your own particular circumstances from a financial advisor.
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., distribute securities products.
There are benefits to an IRA rollover.