Savvy advisors must address the specific financial challenges women face in retirement
by Ron MastrogiovanniMr. Mastrogiovanni is CEO and Chairman, HealthView Services. Visit hvsfinancial.com/
Ben Franklin once noted that nothing is certain but death and taxes. And while most financial advisors are comfortable discussing the latter, talking about death with married couples is difficult. Nevertheless, speaking candidly to couples about survivorship — and planning for it – is a must-do for financial advisors.
Women in general have longer life spans and those in opposite-sex marriages tend to marry men who are older than they are; therefore, women often must be prepared to cover their expenses single-handedly for years after their husbands die. Compounding the problem, her widowhood will likely occur during a phase of life when health care (and potential long-term care) expenses will be at their highest.
The U.S. Government Accountability Office (GAO) in a 2020 study looked at the income security of older women. It found that fewer than half of households with women age 70 or older reported a high level of confidence in their retirement security, which respondents defined as the ability to maintain their independence. This sentiment amplifies a National Council on Aging/Ipsos 2019 report finding that women – by an impressive 11 percentage point margin – are more prone than men to rate financial security as very important.
Financial & Longevity Disparities
The financial and longevity disparities between women and men pose a unique challenge that we describe as the “women’s longevity gap” in our new white paper. It not only explores the challenges women face in retirement, largely stemming from lower working salaries and greater longevity relative to men, but also offers discussion points and strategies to assure her financial security.
A prepared advisor can help women mitigate—and potentially even eliminate—the unique financial challenges of the longevity gap by taking the following steps:
- Make financial plans based on personalized data and actuarial longevity.
- Start addressing retirement health care costs today.
- Begin Social Security optimization planning now (with a focus on survivor benefits).
- Discuss finances and costs, including Medicare surcharges, for the surviving spouse.
- Plan for end-of-life costs for both partners.
Make Financial Plans Based On Actual Longevity
The average healthy 65-year-old woman is expected to live to age 89, compared to 87 for a healthy 65-year old man. Compounding this longevity gap, women tend to marry men two years older than they are, stretching the average length of widowhood by four years or more.
HealthView Services data indicates that a given client may live much longer, or much shorter, than the average, largely depending on how well, or poorly, their health conditions are managed as they age.
Actuarial longevity figures and relevant, personalized data can help advisors pinpoint future health care expenses. With this information, advisors can develop retirement income plans that are appropriate for their clients’ expected life spans. Being able to provide this information on a personalized basis addresses a major concern found in the GAO survey. Namely, women worry about the difficulty of predicting how much money they will need for future health care costs and long-term care needs. And they worry about having sufficient resources to pay for them.
Plan For Retirement Health Costs Today
Few lives come without regret, but financial advisors are well-positioned to erase a key regret woman shared with the GAO: the poor financial decisions and lack of planning when they were younger. Three in five women ages 60 and over say they are worried that their health care costs will exceed their retirement income. Longer life spans, rather than increased use of health services on an annual basis, lead to women typically having higher health care costs throughout their retirement than men. When comparing projected retirement health care costs between a healthy 45-year-old man and his 43-year-old wife, her costs are projected to be about $200,000 higher based on the assumptions described in the chart below. While a large sum, she can fund that amount by investing just $8,000 more today, assuming an investment in a balanced portfolio of 60% stocks and 40% bonds with an average annual return of 6%.
This example demonstrates the value advisors can provide by tackling retirement planning early with couples. The notable lifetime cost increases women face, compared to men, can be offset more easily with early planning for investments and insurance products. Advisors can sharpen the efficacy of these plans by using reliable, personalized actuarial health care cost projections.
Start Social Security Optimization Planning Today (with a focus on survivor benefits)
Social Security benefits never expire, and women tend to collect more years of benefits than men. But a couple’s decisions about Social Security will have a major impact on benefit calculations and her income during the longevity gap.
Social Security’s benefit calculations are based on a complex formula that tracks past earnings. Women tend to have lower earnings over their lifetimes due to pay inequality as well as time spent caregiving (for children, parents and spouses) and out of the workforce. Lower earnings produce a lower primary insurance amount (PIA), which is the starting point for all Social Security benefit calculations.
The following strategies can help female clients maximize the stream of income they receive from Social Security:
- Delay retirement. Social Security benefits are based on the highest 35 years of Social Security-taxed earnings. Filling as many of those years as possible with employment is beneficial, especially from late-career, high income years.
- Delay Social Security filing age. Claiming benefits at 62, the earliest possible age, permanently reduces that individual’s retirement benefits, and yet is the choice made by about one third of women. Delaying benefits, especially if still working, assures women a higher income later.
- Optimize Social Security from a household benefit perspective, including survivor benefits. Advisors should help couples maximize household income rather than looking at each spouse separately. Since many women will outlive their husbands, this approach is particularly important. For instance , benefits for a man (Paul) who claims Social Security at age 70 instead of at age 62, will be 76% higher during his lifetime (see chart). After his passing, his wife’s (Judy) survivor benefit would be 60% higher – a meaningful increase. As the lower wage earner, a woman who is eligible for Social Security benefits may begin collecting her husband’s benefits and forego her own, which are likely to be lower for reasons stated earlier.
- Plan for benefits from former spouses. Women (and men) may be eligible to collect survivor benefits from a former spouse if they meet certain criteria. Making them aware of all of their claiming options can help maximize the benefits they ultimately receive.
Discuss Finances, Including Medicare Surcharges, For The Surviving Spouse
While Social Security is meant to replace 40% of pre-retirement income, other savings and investments comprise the remaining income stream and support a consistent standard of living. However, it is critically important to help clients understand that the sources that fuel retirement income are not treated consistently from either a tax perspective or by Medicare. This area is another chance for financial advisors to shine for their clients.
Known as means testing, Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), determines the surcharges paid for Medicare Parts B and D. These surcharges vary by income and marital status. But when one spouse dies, the survivor’s income threshold is reduced by 50%, despite the fact that many may only reduce their household income by 20% after the passing of a spouse. As a result, women may be pushed into higher surcharge brackets, potentially resulting in tens of thousands of dollars of additional costs.
A financial advisor could address this challenge well before it comes up, with the understanding that Medicare measures one’s means by modified adjusted gross income (MAGI). Some forms of income, such as required 401(k) distributions, do count as MAGI, and other forms, such as health savings accounts, life insurance, non-qualified annuities and ROTH IRA’s do not. Therefore, advisors have a significant opportunity to help clients build a balanced portfolio of savings and retirement income vehicles that will limit taxes as well as substantial Medicare surcharges.
Plan For End-Of-Life Costs
Death can come quickly, or it can be a slow, expensive decline, but it’s an eventuality for all. Advanced planning for significant end-of-life care expenses is not something couples will ever regret. Savvy financial advisors can and should help client couples plan for end-of-life care costs.
In 20 years, a year of nursing home care is expected to cost $175,000, while a year of assisted living would run $100,000, with dramatic regional variations in costs. This consideration is crucial for women, who, on average, spend about two-and-a-half years in long-term care facilities at the end of life. That’s a full year longer than the average man, who often has his wife to care for him.
Accurately planning for a male’s end-of-life care costs is critical to his widow’s ongoing financial security. But planning for her end-of-life care costs is critical to her experience and independence. It will define whether she has suitable care options for her final years or ends up dependent on state support or her children.
Whether couples choose to buy long-term care coverage or free up additional cash to invest, or both, the steps they take now can help fill the women’s longevity gap with financial security.
In the NCOA/Ipsos survey of adults 60 and older, and other survey data, health and finances in retirement emerged as serious concerns, making this fertile ground for financial advisors to provide support services that will earn client confidence and trust, as well as peace of mind.
Offering couples personal health outlooks can help guide savings strategies to assure a financially secure retirement with the resources to manage future health care costs without impacting their desired standard of living.