By Angela Dorsey
Retirement planning feels overwhelming, doesn’t it? I see the look of worry and concern on the faces of my clients when they first come in to see me. All you want is to make sure you have a plan that allows you to experience the retirement you’ve worked so hard for and dreamed of for so long. But even if you’ve saved enough money to retire when you want and how you want, there’s still that nagging question of “What if?” What if we experience a major health issue? What if the markets dive right when we start withdrawing money? What if we missed something in our tax planning? You don’t know what you don’t know.
Retiring is one thing. Retiring on your own terms with the confidence and peace of mind that your plan is rock-solid and will carry you through your decades of retirement—that’s another. Here’s the good news: it’s possible!
Table of Contents
- The Challenges Women Face in Retirement
- Big-Picture Retirement Planning
- It Starts With Your Goals
- Your Retirement Plan Tool Kit
- Map Out Your Living Expenses
- Determine Your Retirement Paycheck
- Make a Social Security Plan
- Review Your Healthcare Options
- Be a Smart Investor
- Beef Up Your Emergency Fund
- Watch Your Credit
- Know What to Do With Your Rental Properties
- Predict Your Taxes
- Get Started on Your Estate Plan
- Appoint Trustworthy People
- Manage Your Risk
- Find a Trusted Financial Planner
- Your Action Items
Women face unique challenges in retirement, including:
- Women tend to invest more conservatively than men. Studies have shown that women generally take less risks when investing, which can result in not reaching financial goals. Women are more likely to hold cash and bonds in their retirement accounts.
- Women are busy balancing work and family. Women are master multitaskers; and when they are busy managing a career or business and family, it’s easy to put thinking about retirement for the future. Women often put their needs, including planning for retirement, on the back burner.
- Women live longer than men. Women on average live longer than men by six years. (1) This means their retirement nest egg must last longer.
- Long-term care expenses. Women usually care for others, and it can drain their finances as they spend their savings on the expenses of a loved one. In doing so, she may be opening herself up to a future lack of funds when it comes to her own long-term care expenses. Most of the population in need of long-term care services are women.
When it comes down to it, we don’t just want to accumulate wealth; we want to accumulate wealth so we can enjoy life and live out our values. That’s why retirement planning is more than simply ensuring you won’t outlive your money. It’s about how you will make your retirement years personally fulfilling and enjoyable. That’s why it’s crucial to choose the best strategy to maximize your Social Security benefits and pension payment options to reach your goals, saving according to a tailored plan, and monitoring your progress so you stay on track. No matter how near or far off retirement is for you, you can take steps now to address any gaps that are apparent or that you may experience down the road.
If you want true retirement confidence, you can’t just Google “Create a retirement plan” and copy someone else’s template. That might get you somewhere, but not far enough, because your goals, values, relationships, personal history, and financial situation are unlike anyone else’s.
To do that, ask yourself a lot of questions, such as:
- What are my top goals?
- When would I like to achieve them?
- What is the estimated cost to complete them?
- When do I want to retire?
- How would I like to spend my time in retirement?
- What does the best day of the best year look like for me?
- Do I know how much I will need in retirement?
- Set a five-year goal, then brainstorm what I can do THIS year to work toward that goal.
- Am I using my money wisely to support my goals?
- If I’m in a relationship, discuss my answers with my partner and see where they stand.
Your retirement plan should include assets from multiple sources, all working together toward a cohesive result. Here’s a breakdown of some savings options your tool kit might include:
- An employer-sponsored retirement account. If you have access to one, try to contribute the maximum amount to your 401(k) or 403(b), taking advantage of the catch-up contribution if you are age 50 or over. This helps lower your taxable income and build your savings. If you can’t contribute the maximum, at least contribute enough to receive your full employer match, if they offer one. Don’t leave any money on the table!
- Traditional IRA. If you are eligible, a deductible IRA gives you a tax benefit now. Your investment grows tax-free, and when you withdraw the money in retirement, you pay taxes on your distributions.
- Roth IRA. When you contribute to a Roth IRA, you don’t get any tax benefit in the present, but your investment grows tax-free and your distributions in retirement are tax-free. Be aware that there are some income restrictions for this type of account: for 2023, those who are married filing jointly must make less than $218,000 to contribute the full amount to their Roth; for single filers, it is $138,000. (2)
- SEP IRA. If you are self-employed, you aren’t out of luck. Look into a simplified employee pension that gives you a tax deduction for retirement contributions.
- Pension. If you are lucky enough to have a pension plan through your employer, be sure to contact your HR department to get a pension estimate so you know what you will receive when you retire.
A lot of people cringe when they hear the word “budget.” We get it. But whatever budget software or process you decide to use, the most important thing is to know where your money is going so you can reach all those goals you set in your first step. If you don’t know how much you need to pay your bills, how will you know how much to save for retirement? One of the biggest retirement derailments we see is overspending due to not having a clear picture of income and expenses.
To make sure you don’t underestimate your retirement needs or miscalculate how much you can spend in your golden years, create a retirement saving and spending plan specific to your lifestyle and your needs. While the general rule of thumb is that you’ll need 70-80% of your pre-retirement income to live on in retirement, that number may be more or less for you.
To start, get clear on your current spending habits. Ask yourself these three questions:
- What are my annual living expenses?
- What are my liability payments (mortgage, credit cards, loans)?
- What are my insurance premiums?
Once you have these numbers, add them up to arrive at a total annual and monthly living expenses figure. Then compare that to your after-tax net income. Is there a surplus that is unaccounted for? If so, you have either underestimated your expenses or you are spending your cash surplus. If there is a surplus, set up automatic deposits into a savings or investment account so you aren’t tempted to spend it.
This goes hand in hand with mapping out your expenses, both now and in the future. In your working years, you are used to receiving a regular paycheck, but in retirement, you have to create your own paycheck that comes from the money you’ve saved or what you receive from a pension or Social Security.
You can’t just withdraw whatever you want when you want it without facing consequences down the road. First, look at your sources of guaranteed income, such as pensions, Social Security, or annuity payments. Then look at your projected monthly and yearly expenses. What’s the difference? The gap in the totals is the amount you need to generate from your investments in a tax-efficient manner. It’s your retirement paycheck. Remember that you will owe income taxes on amounts you withdraw from your pre-tax retirement accounts, so don’t withdraw more than you need, or you will risk getting bumped up to a higher tax bracket.
If you frequently run short on your budget, revisit your expenses. It’s best to know sooner rather than later if you need to reduce spending in retirement or increase the amount of your retirement paycheck. As a practical step, at the end of each year, assess how you did. Did you stay on track with your retirement paychecks, or did you have to frequently withdraw more from your investments? Use this information to make adjustments to your plan moving forward. Also be sure to choose appropriate tax withholdings on your distributions or set up quarterly tax payments so you don’t run into tax issues later.
No matter how much you have saved for retirement or how much you will rely on Social Security, your benefits are no doubt an important piece of your financial future. That’s why it’s crucial for you to have a solid understanding of how your benefits work so you can make the best decisions for your situation.
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you decide to collect these benefits impacts the amount of payout you receive. At 62, you become eligible to receive Social Security benefits for the first time. But before you start claiming Social Security, it’s important to review your benefits and options for claiming so you can plan to maximize your lifetime benefit. If applicable, be sure to educate yourself on Social Security strategies for single, divorced, and widowed women.
If you start claiming benefits at age 62, your benefits are about 30% lower than if you waited for full retirement age at 67. (3) It’s also important to consider how long you’ve worked and your lifetime average monthly earnings, which are used to calculate your benefit. In some cases, working a few extra years can have a big impact on your monthly Social Security benefit. If you’re still working or don’t need the money immediately, you can delay receiving your benefits. Your benefit will increase by 8% for each year you delay, but you cannot delay and increase your benefit indefinitely. Once you reach age 70, you are required to file for benefits and can no longer increase your benefit by waiting. (4)
An important document to reference during the decision-making process is your Social Security statement. The SSA mails these statements out from time to time, but you can also access the same information by setting up an account on their website.
The statement will tell you your:
- Estimated benefit if taken at age 62
- Estimated benefit if taken at FRA
- Estimated benefit if taken at age 70
- Estimated disability benefit
- Estimated family and survivor benefits
- Medicare information
- Earnings history
All benefit amounts listed are estimates and subject to change. They are calculated based on your date of birth and future estimated taxable earnings. If you don’t have a current copy of your Social Security statement, it can be downloaded at https://www.ssa.gov/myaccount/.
While having a strategy for when to claim Social Security benefits is important, it is also critical to analyze your Social Security benefits in conjunction with all your retirement assets. Incorporating your benefits into an overall retirement income plan may make a world of difference in the amount of income available to you in retirement.
Once you turn 65, you will be able to enroll in Medicare. (5) If there is a gap between when you’re retiring and your Medicare eligibility, you will have to find alternative coverage through the Health Insurance Marketplace, COBRA, employer retiree insurance, or your spouse’s employer coverage. These options can vary dramatically in cost so be sure to plan ahead to avoid nasty surprises.
On another note, you should also consider your potential need for long-term care insurance. According to the U.S. Department of Health and Human Services, nearly 70% of Americans turning 65 will face the potential of requiring long-term care at some point during their later years. (6) On average nationally, it costs $315 per day or $9,584 per month for a private room in a nursing home. (7) If you decide that long-term care insurance is the way to go, now is the time to act. Insurance costs increase with age. There is also the risk that your health will change and your application for insurance will be denied. Generally, you will have fewer options the longer you wait.
If you want to get a long-term care plan in place, you have a few options. You can go with a traditional long-term care insurance policy, add a long-term care rider to your life insurance policy, purchase an annuity with a long-term care rider, or start saving for your long-term care so you can self-insure and pay for costs out of pocket. To find out the cost of long-term care in your area, visit this site.
You don’t have to be an expert on the markets to be a smart investor. Following time-tested investment principles could make a world of difference to the growth potential of your portfolio.
Start by determining your ideal portfolio allocation of equities and bonds based on your age, time horizon, and risk tolerance. As time goes on and markets shift, rebalance your portfolio so it stays aligned with your ideal allocation. Different goals will require different investment strategies. For example, saving for retirement is a long-term investment where allocation may shift over time. When you are in your 30s, your portfolio may have more risk to accomplish more growth, but as you get closer to retirement, your risk level should decrease to safeguard your principal.
Investment Wisdom to Shield Your Hard-Earned Money
- High fees will eat away at your money more than you think, so stay away from mutual funds with high fees.
- When the markets get choppy, don’t let your emotions get the best of you. Stay the course, keep your eyes on the long term, and don’t sell when you see your investments drop. That only locks in your losses and you will miss out on the recovery.
- Consolidate your investment accounts when possible. If you have multiple 401(k)s from previous employers and IRAs all over the place, it will be difficult to keep track of them and make sure they’re all aligned with your strategies and goals.
Life happens. As cliché as it sounds, we have all experienced the unexpected curveballs life throws at us. What happens when one of those curveballs comes with a hefty bill attached? Do you have cash readily available to pay for emergencies? If not, that money will likely have to come out of your savings, which means you are borrowing from your future. Not a good idea when you are trying to achieve maximum growth. That’s why one of your goals should be to establish an emergency fund.
There’s no cut-and-dried amount everyone should have saved for a rainy day. Just like almost everything else regarding finances, it depends on your unique situation. While the size of your fund will depend on the size of your family, current debt, and insurance coverage, the general rule of thumb is to have enough to cover 6 to 12 months of essential expenses, such as mortgage or rent, utilities, groceries, insurance premiums, loan payments, transportation costs, etc. If your daily living expenses are low, your emergency fund will be less than that of someone who has a high mortgage, more mouths to feed, and lives in a city with a high cost of living.
Remember that an emergency fund is not an investment. Find a high-yield savings account that will keep your money liquid and safe from risk. You will not regret having an emergency fund. Everyone needs money for the unexpected, so instead of losing sleep every time your car makes a strange sound, or a pipe bursts in your house, rest easy knowing you’ve worked hard to mitigate the damage to your budget. It’s better to have an emergency fund and never need it than not to have one and desperately need it.
Your credit score gives potential lenders a picture of your financial habits so they can determine if they are willing to take a risk on you and give you money and at what interest rate. Many people don’t strengthen their credit score until they reach the point where they need one, but the earlier you start, the better, since building credit takes time. If you want to buy a house, a car, or borrow money from an institution, the better your credit, the lower interest rate you’ll receive—which means more money available to save or pay down that debt.
You can get three free credit reports a year from annualcreditreport.com and a free TransUnion and Equifax report once a week from creditkarma.com. Unlike some free credit reporting options, these are accurate records of your credit from three national credit bureaus. Whether you have great credit or you’re a little nervous to check your score, the important thing is that you are informed about your situation so you can monitor and address any negative entries in your report to increase your credit score.
If you own rental real estate, have you thought about what you will do with it in retirement? This isn’t a simple yes-or-no answer. Your time and money are precious resources that should always be put to good use. If you find that your rental property is giving you a desired boost in income without impeding on your well-being, then you should consider keeping the property. However, if your property isn’t yielding the results you’d like and it’s causing a lot of headaches, it may be time to consider other options.
Ask yourself these clarifying questions to help you determine your next move:
- Do I enjoy being a landlord?
- Is it cash flow positive?
- Am I planning to leave the property to heirs upon my passing?
- How do I feel about my rental properties? Do I enjoy managing the properties or am I getting tired of them?
- Am I looking forward to more appreciation in the properties?
- Would selling the properties give my retirement portfolio a much-needed boost?
Your rental properties can be an asset in your retirement plan if they help you achieve the lifestyle you desire. But if they are only causing headaches and you’re struggling with the stress of unreliable renters, lower ROI than you hoped for, or the tax benefits aren’t worth it, it might be time to reevaluate.
Speaking of taxes, planning ahead can save you money. You can’t avoid paying them, but you can avoid overpaying on your taxes. By safeguarding your future income and taxes now, you may find opportunities to save. When you are living off a fixed income in retirement, tax strategizing can make a world of difference in the longevity of your nest egg.
For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and reduce your tax liability.
Tax planning helps to lawfully structure your income and take advantage of the adjustments, deductions, and credits you qualify for so you pay only what you owe—and not a penny more.
Roth IRA conversions are a great tool to minimize taxes in the future. A Roth IRA conversion is when you invest in a traditional IRA, then eventually move funds into a Roth IRA, paying income tax on the amount you convert and allowing it to grow tax-free from that point on. Another benefit of a Roth IRA is that there are no required minimum distributions (RMDs). You should work with your financial planner or CPA to develop a strategy to convert your tax-deferred accounts into Roth IRAs without pushing you into a higher tax bracket.
In your great to-do list of life, where does estate planning fall? Many people prioritize saving for retirement and paying down debt yet completely ignore the importance of estate planning. We get it. Not only is it easy to get caught up in the pressing needs right in front of us, but it’s also no fun thinking about our own disability or death; many people believe it’s too costly to get these documents in place, or that they don’t have enough money to worry about estate planning. But the truth is, everyone needs an estate plan.
To get started, get these important pieces in place and review them every five years, or whenever you experience a major life change.
Everyone needs a will to spell out their wishes and name someone to handle their financial affairs. Each person’s will is unique and includes different requests, but a few standard essentials to include are:
- Guardianship: If you’re a parent of a young child, this can be one of the most important parts of your will. Be sure to name a legal guardian for your minor children so if you pass away before they are legal adults, they will be cared for by the person of your choice without legal drama.
- Assets: In your will, you’ll define which heirs get what assets. This not only includes the percentages of your savings, investment accounts, or other valuables and sentimental items, but business ownership, real estate, and digital assets as well.
- Property: Beyond assets, you may also have homes and buildings you want to leave to specific people.
Depending on what you want to accomplish with your assets and the specific needs of your situation, you may want to look into setting up a trust fund for your heirs. Contrary to popular belief, these are not just for the very wealthy. Trusts can be a wise way to protect the legacy you’re leaving behind. There are also significant tax benefits in choosing trust funds, as money in trusts bypass probate.
You may consider setting up a living trust, also known as a revocable trust. In the event of your death, the trust ends and is distributed to designated beneficiaries, similar to that of a will, except that the process is quicker and the assets are not taxed. If you’d like to contribute some of your assets to a cause that is close to your heart, you may consider a charitable remainder unitrust (CRUT). This not only aids a charity but also gives you immediate tax breaks. (8)
The next decision to make is to choose who you’d like to take care of certain responsibilities in the event of your death. Some people opt to have one person take on the various roles, while others appoint multiple people to carry out the different tasks. Some states have stipulations on who can serve in these roles, but they are often family members. (9)
The primary roles are:
- Executor: This is the person who is legally responsible for carrying out your will. They will ensure your assets are distributed to your heirs and your valuable items are given to the people you intended.
- Primary agent: A durable power of attorney is a document that gives someone the legal ability to take care of your financial affairs if you are unable to do so. This person, called the primary agent, should be someone who is financially savvy and organized. They will handle any bills or income received and follow your instructions laid out in the durable power of attorney.
- Healthcare proxy: Similar to a primary agent’s job to make financial decisions on your behalf, a healthcare proxy is someone you appoint to make medical decisions for you if you are unable to do so. These wishes can be laid out ahead of time in a document called a medical power of attorney or healthcare directive.
Start a conversation with the people you trust most to handle your affairs and let them know that you are including them in these official documents.
Do you have a plan to manage risk? Some risks are avoidable, while others are not, so make sure you do your part to take care of the avoidable risks by getting the proper insurance coverage. Not only should you evaluate your need for and coverage of your homeowners, auto, and health insurance, but you might also consider an umbrella policy.
Depending on your financial situation, umbrella insurance is extra liability insurance designed to help protect you from major claims and lawsuits. As a result, it helps secure your assets and your future. It kicks in when your other policies have been exhausted and provides coverage for claims that may be excluded by your other policies. Umbrella insurance can provide coverage for things such as injuries, false arrests, lawsuits, property damage, and more. Umbrella insurance fills in the gaps and completes your protection, helping you experience total peace of mind. If you want to go this route, look for liability coverage that is 1-2 times your net worth. (10)
Finding a trustworthy financial advisor can seem like an impossible task. But going it alone is not a good strategy for navigating your retirement. There are many types of financial planners and advisors. While the process of interviewing potential advisors might take time and effort, it is better than either finding out you placed your trust in someone you shouldn’t have or trying to make all the complex retirement decisions on your own.
- Make a list of your top 5 goals with timeline and costs.
- Develop a clear understanding of your living expenses and establish a budget.
- Maintain an emergency fund of at least 6-12 months of living expenses.
- Get a free credit report: http://www.annualcreditreport.com/.
- Carefully analyze and determine the best age to claim Social Security.
- Evaluate the costs and options for healthcare insurance.
- Verify your portfolio has the right mix of investments to match your risk tolerance and meet your financial goals.
- Consolidate retirement accounts where possible to make RMD calculations easier and to simplify your life.
- Take a long-term strategic approach to your investments. Stick to your portfolio allocation plan and rebalance when needed to keep your investments from straying from this plan.
- Think about how you will make your retirement years personally fulfilling and enjoyable.
- Take advantage of the benefits of contributing to retirement plans you are eligible for.
- Figure out what your monthly retirement paycheck needs to be.
- Take advantage of the tax adjustments, deductions, and credits you qualify for.
- Put the proper estate planning documents in place.
- Understand the risks you face, review all your insurance policies, understand what you have, and find recommendations for coverage that better meets your individual needs.
- Check your overall liability coverage. Consider an umbrella policy if you fall short.
- Find a trusted financial planner if you want help.
How We Can Help You
Okay, now take a deep breath! Retirement planning has many aspects, and the more prepared you are, the more confident you will be in your future. But you don’t have to do it alone. At Dorsey Wealth Management, we help you with each of these action items so your plan can give you the maximum amount of peace of mind. We walk our clients through these steps every day and are here for any questions or concerns you may have. Once the plan is in place, we help our clients navigate the changes and many financial decisions they must make to keep their plan on track and their future secure.
Disclaimer: This content is provided by Dorsey Wealth Management and is subject to change at any time without notice. This content does not give financial or investment advice for your specific situation. The content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security.
Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.