Tips to Prepare for a Longer Life
Women often face unique financial challenges that differ from those of their male counterparts. While the gender pay gap is widely recognized, women are also more likely to take time out of the workforce to care for children or aging relatives, thus further widening the income and savings gap.
Perhaps the most significant financial planning challenge women face, however, is preparing for a longer lifespan. While a long, healthy life is the best possible outcome, it also requires careful planning to help ensure you won’t outlive your assets.
The following tips can help women prepare financially for a longer life and achieve greater financial independence in retirement.
#1 – Have a plan in place.
One of the most effective ways to help ensure you don’t outlive your assets is by having a comprehensive financial plan that guides your saving, spending and investment decisions. This plan serves as a personalized road map toward achieving your financial goals, giving you greater clarity and control of your future. A qualified wealth manager can use this plan to run projections and stress-test your strategies, helping you stay on track — even in the face of unexpected changes.
Once you have a plan in place, conduct regular reviews with your wealth manager to make sure your strategy continues to meet your needs as your life and goals evolve over time.
#2 – Save early and often.
Another powerful strategy for combating the risks of longevity is to begin saving and investing as early in life as possible. The earlier you begin consistently investing, the more time your money has to benefit from the power of compounding.
For example, if you invest $300 per month in an S&P 500 Index fund starting at age 20, you’ll contribute $72,000 over 20 years. Assuming a 10% average annual return, your investment would grow to approximately $206,190 by age 40.1
Now compare that to starting at age 30 and investing $600 per month — double the amount. You’d still contribute $72,000 over 10 years, but your investment would only grow to about $114,749, due to having 10 fewer years of compounding.2
#3 – Plan for healthcare expenses in retirement.
A recent study found that to have a 90% chance of covering healthcare expenses in retirement, a man would need to have saved approximately $184,000, while a woman would need around $217,000.3 The difference is due, in part, to women’s longer life expectancies, highlighting the importance of proactive and personalized healthcare planning in retirement.
One of the most tax-efficient ways to save for healthcare expenses in retirement is by contributing to a health savings account (HSA). HSAs offer three distinct tax advantages:
- Because contributions are made with pre-tax dollars, they reduce your taxable income.
- Investments grow tax-free within HSAs.
- When used to pay for eligible medical expenses, HSA withdrawals are tax-exempt.
Additionally, HSA contributions made via payroll deductions are exempt from Social Security and Medicare taxes. Unlike with 401k contributions, HSAs also have no required minimum distributions (RMDs). Once a certain balance is reached, HSA funds can be invested, offering the potential for long-term growth and further enhancing your retirement savings.
As you approach age 65, you may consider purchasing a Medicare supplement plan to help pay for retirement healthcare expenses not covered by Medicare. There are many options for supplement plans, and it’s important to have a clear understanding of your coverage, deductibles and out-of-pocket costs in order to choose a plan that meets your specific needs. Your wealth manager can guide you through your options and help select a plan tailored to your unique needs.
#4 – Invest for the long term.
A common mistake made by retirees is shifting too much of their portfolio into conservative investments, like CDs and bonds. While it’s prudent to safeguard your short-term living expenses from market volatility, it’s equally important to keep a portion of your assets invested for growth in order to maintain your long-term purchasing power. This is especially critical for women, who may spend 20 to 30 years or more in retirement.
At Creative Planning, we typically recommend maintaining three to five years of living expenses in short-term, semi-liquid investments. This is generally a mix of bond funds that can provide capital for opportunistic rebalancing and a monthly income. Having a short-term allocation to bonds can prevent you from having to sell out of equities at a loss when markets are down.
Any assets that aren’t needed to fund your short-term needs should be invested in a diversified portfolio with a focus on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it can be invested in riskier assets than your short-term account. Throughout retirement, your wealth manager will help you identify opportune times to transfer assets from your long-term savings to your short-terms savings in a tax-efficient manner.
#5 – Establish a tax-efficient withdrawal strategy.
Another important aspect of planning for longevity is establishing a strategic withdrawal strategy. A well-structured approach can help prevent overspending early in retirement, a mistake that can be difficult to recover from and may jeopardize long-term financial security.
Ideally, you’ll have assets invested across accounts with varying tax treatments. This diversification provides greater flexibility to design a tax-efficient withdrawal strategy. As you plan, consider the tax characteristics of the following account types:
- Taxable (non-retirement) accounts – These accounts offer the benefit of lower qualified dividend and capital gains tax rates.
- Tax-deferred retirement accounts, such as IRAs and 401ks – While these accounts offer tax-deferred growth, withdrawals are subject to ordinary income tax.
- Tax-exempt retirement accounts, such as Roth IRAs – These accounts allow investments to grow tax-free, and qualified withdrawals aren’t subject to income tax, making them valuable for long-term, tax-efficient planning.
Your tax bracket, Social Security benefits, additional income sources and retirement goals are important considerations when establishing a retirement withdrawal strategy. Your wealth manager can help you develop a personalized drawdown plan that meets your financial needs and minimizes tax impact.
