Advice for men and women about women's financial security in retirement - The Boston Globe
I've thought about dying before my wife Georgina after reading two recent studies on women and retirement.
"Compared with men, women will likely have lower retirement savings yet they'll need to make those savings last longer and plan on being on their own at some point," concludes "Why Women Worry," part of ongoing research on retirement issues by the financial firm The Hartford and MIT's AgeLab.
On average, a woman, 65, can expect to live to 85, about three years longer than men, and has a 23 percent chance of living past 95, based on mortality tables.
"When a woman outlives her husband, her income decreases by 50 percent on average yet expenses only decrease by 20 percent," the study said.
The second study, "Lifetime Income for Women: A Financial Economist's Perspective," was authored by David Babbel, a professor at the Wharton School of Business, and cosponsored by New York Life Insurance Co.
Babbel argues women should allocate substantially less money to stocks and stock mutual funds in retirement and more to immediate annuities that guarantee an income for life in return for a lump-sum premium.
"Annuities are even more important for women because their risks are compounded by longer life expectancy as well as potentially outliving husbands by six years or more (wives tend to be younger than their husbands)," said Babbel. He concludes that income annuities from top-rated insurance companies can provide secure lifetime income for 25 to 40 percent less money than it would take an individual.
That's because insurance companies base their payouts on average life expectancies (premiums from those who die early subsidize payments to those who live longer). When we invest on our own, we must plan for our money to last several years beyond life expectancy, just in case.
For this reason, financial planners often recommend retirees withdraw no more than 4 percent of savings the first year of retirement, increasing the amount by 3 percent a year to counteract inflation.
But, several top-rated insurance companies offer lifetime annuities with payout rates of 5 percent or more the first year for a 65-year-old couple, raising the amount 3 percent a year and with a "refund" feature (if both spouses die before income payments equal the premium, a beneficiary gets the difference).
But with income annuities, we typically give up our principal and can't access it beyond the scheduled income payments. Some contracts allow exceptions at the cost of lowering income.
In all states, guaranty associations belonging to the National Organization of Life and Health Guaranty Associations back income annuity obligations up to a limit ($100,000 or more per company depending on the state) per policyholder if an insurance company goes bankrupt.
Humberto Cruz is a syndicated columnist. He can be reached at askhumberto@aol.com.
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