Will You Be Able to Afford to Retire?

Back to Work After 15 Years

Is the idea of retiring a fond dream or a recurring nightmare? Women are often afraid of not having enough money for a comfortable retirement -- and for good reason: We typically have shorter, spottier salary histories than men, and since we live at least five years longer on average, we often have more years of retirement to finance. Small wonder that 50 percent of women fear losing everything and becoming bag ladies, according to a 2006 study.

So what are we doing about it? Not enough. Although 93 percent of women say that saving for retirement is their primary investment goal, according to a 2005 survey by OppenheimerFunds, 47 percent are not even contributing to a retirement plan. But whether you're too busy, too intimidated, or just convinced that you've waited too long, take heart and take stock: It isn't too late. We've asked the experts for advice on typical midlife situations and what women can do to make their dream retirement a reality.

Diane, now 44, left her job as a sales representative 15 years ago when her son was born and continued to be a stay-at-home mom for his now-10-year-old twin sisters. She wants to go back to school to get her teaching certification. Her husband, Matthew, 55, makes a good living as a technological systems consultant but because he is self-employed, the family has to provide their own health insurance. Matthew has neither a 401(k) nor a pension and, owing to the money the couple puts into a 529 college savings account for the kids, they haven't saved anything for retirement.

From Kathleen Longo, a certified financial planner with Accredited Investors, in Edina, Minnesota:
When people go back to school in midlife, their households undergo a lot of change. Diane's family is relying on the salary she'll get down the road to cover their retirement savings but regardless of the expenses of Diane's education, they should start saving for retirement now, even if it means funneling the money they've been putting into their children's college funds into Roth IRAs instead. (Since he's over 50, Matthew can take advantage of catch-up provisions to sock away more than those under 50 are allowed to deposit.)

It's also crucial that Diane and Matthew examine their current finances and determine how they are going to pay for Diane's education. They might want to think about short-term borrowing with the intention of paying off the loan with Diane's first paychecks. Student loans are a possibility, as is asking their parents to lend them the money. Family loans can work well for both parties: A reasonable interest rate could be slightly more than the 5 percent return on a certificate of deposit and would still be less than the 8.25 percent typical of today's home equity loans.

Eventually, Diane will probably be eligible for healthcare benefits through her job, which may help cut down on the costs of their health insurance, and she'll probably have a disability insurance policy through her employer, too. Meanwhile, Matthew needs to make sure he has both disability and life insurance -- enough that if he's in a disabling or fatal car accident, the mortgage will be paid and Diane will be able to complete her certification. A short-term policy -- about 15 years, to ensure that there's enough money for the kids to finish college and for Diane to get established in her new career -- is the most affordable way to cover that possibility.

Once Diane starts working she should immediately begin maxing out her retirement plan options to make up for lost time, even if that means not adding to the kids' college savings accounts. You can always borrow money for education, but you can't borrow for retirement. Matthew and Diane may even need to tell their children that they may have to take out loans or work while in college. Later, when the situation improves, the parents can help pay off the children's loans -- a far better option than asking the kids to fund their retirement.

Thriving After Divorce

Sula is 46. She met her husband, Jim, 48, at the hospital where she was a nurse and he was doing his medical residency. Her salary helped support them while Jim was getting established as an orthopedist. She left her job when she got pregnant with their son, now 14, and hasn't worked since then. Last October Jim confessed that he was seeing another woman. He has since moved out of the house and they are discussing divorce. In addition to her other worries, she is concerned about how to ensure a secure retirement for herself.

From Candace Bahr and Ginita Wall, San Diego, California-based financial planners and cofounders of the Women's Institute for Financial Education:
When you're getting divorced, your future depends on the decisions you make today. So it's important to think carefully not just about what you want for the present but what you want long term.

Originally, Sula, like most women, wanted to trade her right to half of Jim's retirement savings for full equity in the house. But this is a bad idea: What would she retire on? Additionally, even though the equity in the house is worth about as much as the money in his retirement fund, Jim says it's not an equal trade because the retirement money will be taxed when he retires, so he wants to discount it accordingly. Finally, Sula won't be able to afford to maintain the property by herself -- and when her son goes to college in a few years the house will be too big for her.

The best choice for Sula would be to agree with Jim to sell the house and split the proceeds (and his retirement fund). Because she and Jim are still joint owners, the first $500,000 from the sale is free from capital gains tax. She and Jim can even delay selling the house until after their son leaves for college and still get the tax exclusion as long as Jim grants Sula sole use of the house. Sula would have to pay the mortgage every month but the cost of major repairs could be negotiated as part of the divorce settlement.

If they agree to the 50-50 split, Sula also needs to decide what to do about her portion of Jim's 401(k). She can roll it over into her own IRA or leave it with her husband's employer and get it at the earliest age he can retire. Given life's uncertainties, we'd advise Sula to transfer the money to an IRA that's under her own control. Sula should also realize that she may not end up receiving any of Jim's Social Security benefits. While they were married for more than 10 years and she is eligible for a derivative benefit equivalent to one-half of what Jim will receive, no double-dipping will be allowed. So if Sula goes back to work, her own benefit for her years of work will probably replace the derivative.

Sula needs to take a good hard look at how best to maximize her income -- and her potential to save. If she receives child support, the payments will run out in a few years (in most states when her son graduates from high school) and may not cover her expenses anyway. If Sula wants to go back to school, great -- investing in your own earning power is always smart. But a better bet may be to renew her nursing credentials, which could be faster and more economical. Talking to a career counselor would be worthwhile.

Above all, Sula needs to figure out how to save. The good news is that, even in her 40s, she can still save enough to ensure a comfortable retirement. But first she will probably have to face making do with half of what she lived on before. Women going through a divorce often resent cutting back, but learning to live on less will help Sula take charge of her life. Assuming control of her finances may seem daunting, but she has years to prepare and recover from any financial mistakes she might make.

Single Without Savings

Janine is 42 and unmarried. She spent her 20s in graduate school, then bounced around a series of low-paying jobs. She landed at her present employer three years ago; she enjoys her work and there are chances for promotion. She paid off her student loans last year but doesn't own any property, though she wants to buy a home.

From Bonnie A. Hughes, a certified financial planner and owner of A&H Financial Planning and Education, in Kennesaw, Georgia:
Janine never really thought much about saving until panic set in, so we need to get her into the habit. First, she should work with a financial planner, who can give her a global view of her situation, determine where she is, envision where she'd like to be and measure her progress. A good planner will help her stay on track.

Next, Janine should max out her 401(k) contributions and, if she can, also max out an IRA, preferably a Roth IRA, if her income isn't too high for her to be eligible (more than $110,000 for a single person). Unlike withdrawals from regular IRAs, money withdrawn from a Roth isn't taxed as long as you've waited five years since opening it.

At the same time, Janine should think seriously about buying a home sooner rather than later -- even if it means putting off her Roth IRA for a few years. Mortgage rates are low, and while paying for her mortgage and upkeep may cost more than Janine's monthly rent, owning property lets her build up equity that she can tap as an income source later. As long as she tempers her expectations, she can probably find a reasonably priced home that she can pay off by the time she retires in order to reduce how much income she needs then.

Finally, Janine should pick out just a couple of monthly indulgences and enjoy them thoroughly but otherwise focus on her future. The money she saves should go straight into her retirement accounts.

7 Steps to Smart Savings

1. Get a financial planner.
Women underuse this resource, but 73 percent of those surveyed recently said working with an adviser made them savvier and 66 percent felt more confident about having money for the future.

2. Save aggressively, but invest cautiously.
Risk does not always yield reward, according to the Schwab Center for Investment Research. Since 1970, an aggressive investor earned an 11.2 percent average return while a moderate one got 10.5 percent. But the slightly higher return was offset by higher risk -- and larger losses in the stock market -- during down years.

3. Don't skimp on insurance.
Unexpected expenses derail savings plans fast, so get enough coverage for health, disability, home, and auto. For breadwinners, life insurance is a must.

4. Retirement savings trump college savings.
Your kids have their whole lives ahead of them to pay off their college loans. When you retire, you won't have the same luxury.

5. Keep wills and insurance policies updated.
If there's a death in the family, your financial plans can collapse if your papers aren't in order. Make sure your policies don't still name parents or ex-spouses as beneficiaries.

6. Build equity, don't tap it.
Owning your home gives you a nest egg that you can draw on when you downsize. But don't take that value out too soon -- or you'll still be paying off your mortgage after retirement limits your income.

7. Take advantage of your age.
At age 50, in 2007 you can increase your annual 401(k) contribution from $15,500 to $20,500 and the contribution to your IRA from $4,000 to $5,000.

Originally published in Ladies' Home Journal, March 2007.