Learn and Plan:
Women and Retirement

Men and women have the same financial opportunities (and risks), the same vehicles for saving, investing, and borrowing. However, their circumstances and choices can be very different.

Retirement planning is a challenge for everyone, but women face particular challenges.

  • Women live longer than men—on average 5½ years. So they will probably have to plan financially for a longer retirement. For many of those years women are likely to be on their own.
  • Women tend to earn less than men and participate in the work force less steadily. Thus they lose income and job seniority and are less likely than men to fully participate in a pension or profit-sharing plan.
  • When women do build up funds, they tend to borrow against their balances or tap them when they switch jobs or need money.
  • In 2007, men age 65 and over had an average income of about $34,000, while women averaged about half that income ($18,000).

At the same time, women have lots of things working in their favor. The biggest pot of money many women will control is their retirement assets. Even women who don't work outside the home can have retirement funds of their own, and married women may be entitled to a share of their husbands' funds.

More good news: the wage gap is narrowing. Women are more likely to be employed, to have access to a pension plan, and to be saving for retirement. And younger women are investing less conservatively.

Open an IRA

Individual Retirement Accounts (IRAs) are retirement plans set up and funded by individuals. They enable you to save for retirement and get tax benefits.

  • With Traditional IRAs your contributions can be tax deductible. Generally, you don’t pay taxes on the money you put into your IRA account when you make the contribution. But you do pay taxes on the money when you withdraw it from your IRA after retirement.
  • With Roth IRAs, you pay taxes on the money that you contribute to your IRA when you make the contribution. But you don’t generally pay taxes on the money when you withdraw it from your account after retirement.

IRAs are a great deal for lots of reasons and are especially attractive for women. They are widely available. Anyone who has income from a paying job can have one. So you don't have to depend on your employer to offer a pension plan; you can start your own. If you are a stay-at- home spouse without an income and your partner is employed, you can still put money into an IRA. That way, you can have your own retirement plan. Alimony payments count as income for purposes of opening an IRA.

Compare Roth IRAs and Traditional IRAs

IRAs for Stay-At-Home Moms

One of the great features of an IRA is that you can have one even if you don't have a paying job, as long as your spouse is employed. In that case, you can contribute up to $5,000 ($6,000 if you are over 50) a year to an account for you. You can open either a traditional or a Roth IRA, depending on your joint income.

If you open a Traditional IRA, you can usually deduct the contribution to the spousal account even if the contribution to your working spouse’s account can't be written off.

If your spouse is covered by a retirement plan at work, your spousal IRA deductions are limited by the income test, but a much higher income limit applies to spousal IRAs. A contribution to a spousal account can be fully deducted as long as your Adjusted Gross Income (AGI) is under $166,000; a partial deduction is allowed until income hits $176,000.

You can pass up the deduction altogether and open a spousal Roth IRA. Or you and your husband can hedge your bets and open one of each, traditional and Roth. The point is, you can and should have your own retirement savings even if you don't have a paying job outside the home.

Take Full Advantage of a 401(k) plan

If you work in private industry, you may be eligible for an employer-sponsored 401(k)plan. If you work for local government or a non-profit, your employer may offer its twin—the 403(b) plan. These retirement plans (named after sections of the tax code) are known as "defined contribution plans." Although your employer chooses the plan to set up, you decide how much to contribute and how to invest your money, choosing from a menu of investment options your employer offers. Many employers match your contributions: 50 cents on the dollar is common. Some employers are more generous.

All around, it's a great opportunity for women who entered the work force late, or delayed starting a retirement plan because they were using their income to pay for the kids' braces, the family vacation, or tuition bills.

Women tend to move into and out of the work force more frequently than men, and spend less time in any one job. That means it’s tougher for them to become fully vested—to earn the full right to benefits accrued under an employer's retirement plan. You are always vested in any money you contribute. Recent changes in vesting schedules speed up your claim on your employer's matching contributions. A plan may have a vesting schedule that gives you the right to 100% of your benefits after just 3 years of service. Or your employer may have a gradual vesting schedule that gives you full vesting after 6 years.

Investing for Retirement: A Comparison of Tax-Advantaged Retirement Programs

Plan for Joint Retirement

If both you and your spouse are eligible for 401(k) plans, both of you should participate. Figure out how much your joint budget will allow, and try to make equal contributions so that each of you has a retirement fund and takes full advantage of any employer match. Don't get yourself into a situation where all the retirement money is in your husband's name, and all your own earnings have gone toward paying for shorter-term expenses

What Can Women Expect From Pension Plans?

Historically for men, the cornerstone of their retirement plan is the traditional defined-benefit pension, a fixed monthly payment pegged to years of service and salary level. For women, traditional pensions have played a smaller part.

  • Many women work in the service sector and in small businesses, where pensions are less common.
  • Many women work part-time. Companies are permitted to exclude even long-term employees from their pension plans if they work less than 1,000 hours a year.
  • Many women don't stay in a job long enough to qualify, often because they drop out of the work force for an extended time to raise children.
  • Many women earn less than men even when they are covered.

Unfortunately, while more women are working long enough to qualify for traditional pensions, companies are moving away from defined-benefit plans—traditional pensions—toward defined contribution plans, such as 401(k) plans. Still, many women are covered by traditional pensions. Your benefits director can spell out your plan and benefits.

If your employer has a pension plan, federal law requires that you must become a member no later than age 21 after one year of employment. Once you're a member, you start building up your rights to pension benefits year by year. (The "summary plan description" can give you the precise formula your employer uses.)

Even though you may be building up pension benefits, you're not completely entitled to them until you're 100% vested. Now that full vesting is available in as little as 3 years, you could qualify for benefits even if you're on the move. If you switch jobs, keep a record of what you're entitled to from each employer, or contact past employers if you have lost track.

Each plan also lays down rules defining your pension status when you have a "break in service" from a layoff, an extended leave or if you do not work a full year. Federal law says that a full year is 1,000 hours of service, and that a break occurs if you work fewer than 500 hours in a year. But the law protects you if you miss an extended period of work because of pregnancy, childbirth, or adoption of a child.

Make the Most of Your Husband's Pension

For married women, your husband's pension benefits can provide a big chunk of your financial security or a comfortable cushion if you also have a pension. This is particularly true in the case of widows. Federal law requires that company pension plans offer survivor's benefits. Electing a survivor's benefit (also called the joint-and-survivor option) reduces the pension you and your husband receive during his life, but you would continue to get payments after his death.

If your husband wants to give up his (and your) right to survivor's benefits in favor of a higher pension during his lifetime, you have to agree in writing. Think twice about it. It's generally not a good idea, unless you don't expect to outlive your husband, or you have access to substantial assets of your own.

For your own pension, though, the joint-and-survivor option may not be the best choice. Unless your husband is significantly younger or in better health, chances are he won't survive you. So it might make sense to take full benefits during your lifetime.

In choosing a joint-and-survivor pension, you and your husband have two options:

  • Joint-and-survivor 100%. This guarantees that the payments your husband receives over his lifetime will continue at the same level for you after he dies.
  • Joint-and-survivor 50%. Payments will be somewhat higher during your husband’s lifetime, but they will be cut in half after he dies.

Which option is better depends on your financial situation and health. If you're substantially younger than your husband and don't have a pension, joint-and-survivor 100% may be the better choice. But if you have your own financial resources, you may want to take advantage of larger payments during your husband’s lifetime.


F206 (4/09)

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