By preparing now, women can set themselves up for a more prosperous tomorrow. Here are 10 things professional women should know about their financial future:
- Anticipate that you are likely to live a long life, and plan accordingly. According to U.S. Census Bureau statistics, a woman who reaches the age of 50 today without serious health problems can anticipate celebrating her 82nd birthday. By 2015, life expectancy of all women in the United States will reach an estimated 81.4 years, on average, compared with men’s life expectancy of 76.4 years. In addition, the average age of widowhood in the U.S. is 59 years old.
- Beware of being overly conservative in your investments. Being overly conservative when you are young can seriously erode the value of a retirement account. You may need to rely on this money for 30 years or more. A financial advisor can help you decide on the mix of assets that is appropriate for your age, risk profile and objectives.
- Pay yourself first. Invest for your future now. By investing systematically over a period of time, you will be surprised how fast your nest egg can grow. Hypothetically, if you began investing $5,000 per year ($417 per month) at age 25, earned a six-percent return, and fell into the 25-percent ordinary income tax bracket, you could accumulate over $350,000 in a traditional IRA and nearly $420,000 in a Roth IRA by retirement time.
- Choose an IRA that’s right for you. Take advantage of complimentary IRA and pension calculators, or ask your financial advisor to help you compare the projected results of contributing to different types of accounts, including transferring assets from a traditional IRA to a Roth IRA.
- Fund your IRA, 401(k) or other employer-sponsored program to the maximum. You can build up a good portion of retirement savings if you contribute the maximum allowable amount into deferred income plans, such as a 401(k). You will reduce your current taxable income, and the tax-deferred compounding feature of these plans allows you to accumulate more than you would in a comparable account that taxes earnings each year.
- Investigate your Social Security benefits. According to the U.S. Social Security Administration, nearly 60 percent of the people receiving Social Security benefits in the U.S. are women. Even if you are divorced, you may be eligible to receive benefits based on your ex-husband’s work if certain conditions are met. Widows may also be eligible to receive benefits. The Social Security Administration publishes a useful guide to understanding your benefits titled “What Every Woman Should Know” (SSA Publication No. 05-10127, ICN 480067, September 2011). You can also call the Social Security Administration at 1-800-772-1213.
- If you are employed and decide to switch jobs, check your complete benefits package. This should include understanding the portability and vesting rules of your retirement plan. The U.S. Bureau of Labor Statistics reports that, on average, college-educated women (those with a bachelor’s degree or higher) hold 12.2 jobs between the ages of 18 and 46. Depending on the vesting schedule of different employers, changing jobs frequently can limit the growth of retirement plan assets.
- Investigate your employer’s tuition reimbursement benefits. In the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey, 74 percent of workers said they expected to work for pay in retirement. Going back to school to develop “secondary employment skills” or to learn a new field can be a tremendous benefit if you choose to make a career or job change at a later date.
- Consider long-term care health insurance. The cost of care is an important variable to plan for. Based on national averages published in the Genworth Financial 2011 Cost of Care Survey, it currently costs $43,472 per year to hire a home health aide, $39,132 for assisted living, and $77,745 for a private room in a nursing home.
- Plan ahead to make sure you don’t leave any more than necessary to Uncle Sam. If you expect to leave something to your heirs, establish an appropriate estate plan. Without proper planning, estate taxes, state taxes and income taxes on retirement plan distributions can reduce your estate substantially.
Call your financial advisor to discuss your goals. To put into effect and build a financial strategy that will help you achieve your ideal retirement, consult regularly with your legal, tax and financial experts. iBi
Cathy S. Butler, CFP, CRPC is a financial advisor with the Butler/Luthy Group of Morgan Stanley Wealth Management. She can be reached at (309) 671-2873.