Eight Retirement Planning Mistakes Women Often Make – Part 1

Although we are not a firm that is exclusively focused on women, we are delighted to see that so many women seek us out for our services.  As such, my colleague Karen and I have done quite a bit of work with women and have developed the following list of planning mistakes we often see women make more often than men (yes, we’ll get the men’s list together soon).  Here is Part 1 of our list, stayed tuned for more:

1. Thinking that you must have long-term care insurance.  It’s true that women live longer and earn less over their lifetimes than men.  Just visit any nursing home or assisted care facility and you’ll see that the majority of the occupants are women.  But this doesn’t mean you need long-term care insurance.  Last year we wrote a Brief entitled “Should you Purchase Long-term Care Insurance?”  This Brief lays out a framework to help you decide whether you need LTC insurance.  Bottom line:  If you have enough money to self-insure, this is the way to go in my view.

2. Not having a long-term care plan.  Ok, I just said you might not need long-term insurance but everyone needs a long-term care plan.  Women, especially, need a plan because they are less likely to be able to rely on their spouse for care, given that they live longer and often marry somewhat older men.

3. Being overly conservative with your investments.  Because women live longer, earn less and typically have saved less for retirement than men, they think they need to invest their assets very conservatively to make their money last.  But with current and prospective low bond yields, absolutely no return to holding cash, conservative investors may find it very difficult to draw sufficient income from their portfolio.  We believe a prudent, but more balanced (read:  higher equity percentage) portfolio makes more sense in this environment.  Check out our Brief entitled: “What is the Right Retirement Portfolio?” to learn more about our views.

4. Underestimating your life expectancy.  Almost every time Karen and I show our clients a financial projection through age 95, they typically say, “well, I’m not going to live that long!”  Part of the problem is that folks don’t typically study life expectancy tables, and they also tend to rely on the mortality tables published by Social Security. The problem with Social Security’s tables is that they include all Americans, even those who lack access to adequate health care and who smoke.  The Annuity 2000 Mortality table represents the average mortality for pension recipients or annuitants, who are typically healthier than the general population.

Figure 1 uses the Annuity 2000 data to calculate death by age bracket for a 60-year old woman.  Bottom line: she has a 26% chance of living to age 95 or more!

5. Confusing Yield with Income. Yield is the dividend that a stock pays or the interest that a bond pays.  But yield is not the only source of income.  The total return on a security is the sum of the yield the security pays and the appreciation of the security over a given time frame.  Thus, income can come from two sources:  the yield or (by selling some of the security) the appreciation of the security.  Taking income via selling some of an appreciated asset is an increasingly important and necessary way to get income in our low-yield world.