I recently taught a 90-minute personal finance class for women aged 50+. While preparing for the class and delivering it, I noted some major financial concerns of this demographic group that I am personally part of. This post describes ten things that older women need to consider about personal finance during the second half of their financial life:
Unique Financial Characteristics
Women are more likely than men to have gaps in their employment history and to be more negatively impacted by divorce than men.
Some defer financial tasks to others and, thereby, lack financial experience.
This is a mistake. About 90% of women will need to manage money alone at some point in their lives.
“Through Retirement” Goals
Working-age women often focus on “to retirement” goals (e.g., saving for later life in an IRA or 401(k) plan) while older women need “through retirement” goals.
Goals should be SMART (Specific, Measurable, Achievable, Relevant, and Time-related. To write a SMART goal, use this language: “I want to” [describe goal] “by” [list a time deadline] “so I will” [describe action steps required to achieve the goal on time].
Cash Flow Challenges
Women of all ages are concerned about cash flow, i.e., the relationship between income and expenses.
Ideally, cash flow should be positive (income greater than expenses) or, at the very least, flat (income = expenses).
Three ways to achieve positive cash flow are increasing income, reducing living costs, or doing both.
Smart Borrowing Decisions
Tips shared in the class include shopping around for credit and paying credit card bills in full, if possible or, otherwise, more than the minimum.
Also, avoiding being “upside-down” on a loan (owing more than the item money was borrowed for is worth), checking credit reports and scores regularly, and selecting credit cards that match your repayment style (e.g., “convenience user” that pays in full or “revolver” that carries a balance).
“Large Loss” Risks
Insurance experts recommend spending limited insurance premium dollars on risks that carry the potential to cause large financial losses.
Five major “large loss” risks for older women are the death of a spouse (resulting in reduced income or benefits), damage to (or destruction of) a home, liability claims due to court judgments, large medical expenses, and high long-term care expenses (e.g., assisted living and nursing home costs).
Four common risks that all investors are experiencing now are market risk (when securities drop as a result of an overall market downturn), interest rate risk (the inverse relationship between interest rates and bond prices), inflation risk (loss of buying power due to a rise in prices), and business risk (risks associated with only one company or industry sector that cause it to fall out of favor and lose money).
Expenses likely to increase in later life include medical/dental expenses, health insurance premiums (e.g., Medicare Part B and Medigap policy premiums), travel and entertainment, and philanthropy/gifts.
Those likely to decrease include auto expenses, clothing, and home maintenance/utilities (if downsizing).
Depending on household income/assets and lifestyle decisions, income taxes and housing costs may increase or decrease.
Sources of Retirement Income
Income sources include Social Security, employer defined-benefit pensions or defined-contribution retirement plans (e.g., 401(k)s), tax-deferred accounts (e.g., IRAs), taxable accounts, rental real estate, other assets (e.g., reverse mortgage and collectibles), and employment earnings.
Social Security benefits are based upon 35 years of career earnings and the earnings limit applies to benefits prior to full retirement age.
Retirement Asset Withdrawals
Many older adults use IRS-required minimum distribution (RMD) rules to determine how much money to withdraw from savings. Others follow (or tweak) the so-called “4% Rule” where they withdraw a percentage of savings (e.g., 4%) and adjust the amount annually for inflation.
Another common strategy is to create a retirement “paycheck” with annuities that provide guaranteed income for life or a certain time period.
Many older adults want a “good ending” to their life. Estate planning can help.
Tips shared at the class include preparing the “Big Three” documents (will, durable power of attorney, living will), writing a letter of last instructions, regularly reviewing beneficiary and personal representative designations, tax-advantaged charitable gifting, and making sure that property titles do not conflict with a will.
The class for older women was based on content from the book Money Talk: A Financial Guide for Women which can be downloaded for free online.