Smart steps to retirement for women

by Nikki Arwood
For Virginia Business
August 2005

Women represent nearly 47 percent of the work force, and they collectively own 10.6 million businesses that generate more than $2.5 trillion in revenue and employ 19 million workers. They also make up 43 percent of American individuals with assets of more than $500,000.

Yet women face unique financial planning challenges. They generally earn less than men during their careers, live an average of seven years longer, and tend to move in and out of the work force more frequently to raise children and care for aging parents. Consequently, women may have less money to fund a potentially longer retirement.

Women are also likely to feel less confident about their money management skills. Research shows that women in their 40s, 50s and 60s weren’t taught about money and investing as they grew up. But many younger women also feel unprepared to handle their finances. In a survey conducted by Charles Schwab & Co. Inc. in 2001, 30-something women were just as likely as older women to say, “Investing is scary.”

Priority No. 1: your own retirement
You should definitely think twice if you are tempted to finance your kids’ education with money you otherwise would put away for retirement. You won’t be doing your children any favors if you put them through school only to become financially dependent on them down the road. After all, financial aid is available for college, but you’ll have a hard time getting loans or scholarships to fund your retirement.

The old rule of thumb was to save enough money so that, when you stop working, you would able to live on 70 to 80 percent of your pre-retirement income. But many people prefer for their income during retirement to be equal or higher than it was during their careers, following the idea that a comfortable retirement should continue or enhance their current lifestyle.

Calculations by the Schwab Center for Investment Research estimate that for every $1,000 of monthly income desired in retirement, about $300,000 should be saved. Therefore, in order to generate an annual retirement income of $75,000, a moderate investor would need to have saved approximately $1.88 million to retire.

Regardless of where you are along the planning continuum, here are some tips to help keep you on track:

• Take advantage of all tax-deferred accounts available to you: Contribute the full amount allowed by the IRS to your employer’s retirement plan and to an IRA. You can contribute up to $14,000 to a 401(k) plan and up to $4,000 to an IRA for 2005. Depending on your situation and the scope of your 401(k), the amount you contribute to a traditional IRA may also be tax-deductible. Once you turn 50, the IRS will allow you to save more in both your 401(k) and IRA. This “catch-up” provision was created specifically with women in mind, because of their tendency to move in and out of the work force.
• Make sure your investments are diversified: Studies have shown that the most successful investors take a consistent and systematic approach to investing. Their portfolios remain diversified across and within asset classes (stocks, bonds and cash). No single investment can give you a balance of risk and reward.
• Consolidate your retirement accounts. It’s hard enough to stay on top of our daily responsibilities without adding unnecessary complexity. If you’re still trying to track a 401(k) housed by a former employer or to track a number of small IRA accounts that you’ve opened over the years, it becomes even harder. By consolidating you can likely lower your fees and ensure all of your money is working together.

Planning for college
When it comes to college planning, start crunching the numbers. You don’t want to sacrifice one goal for another, so consider the following suggestions:
• Compare the costs of public vs. private schools and take advantage of financial aid.
• Save money by sending your children to junior college for one or two years, before transferring them to a four-year institution.
• Encourage your children to work part time and put money toward books and tuition.

Get help if you need it
There is no shame in seeking advice. A professional financial adviser can help by regularly reviewing your holdings to make sure they reflect your risk tolerance and time frame.

Don’t panic if you’re behind schedule. You can always cut back on current expenses and adjust expectations about how long you will work; even adding five years can make a big difference.

The precise plans you come up with now may change down the line, and that’s fine. Financial planning is not a static event, but a process.
Nicole Arwood is regional branch executive for Charles Schwab & Co, Inc., responsible for managing the firm’s individual investor business in five states and the District of Columbia, including six branches in Virginia. She has been with Schwab for more than 14 years.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

Nicole Arwood is regional branch executive for Charles Schwab & Co. Inc., responsible for managing the firm's individual investor business in five states and the District of Columbia, including six branches in Virginia. She has been with Schwab for more than 14 years.