Women, Investing & Retirement, Part 2 Transcript 7/05/2013 #1002

July 5, 2013

CONSUELO MACK: This week on WealthTrack, plotting a course towards a secure retirement. Award winning financial advisor Erin Botsford and social security expert Mary Beth Franklin map out the strategies and products you’ll need to anchor your financial future, next on Consuelo Mack WealthTrack.

 

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. Here’s a shocker. Almost half of American women fear becoming a bag lady someday! And even among the affluent- those are women in households with annual earnings of $200,000 plus- 27% fear living on the streets in their old age. Are these fears justified?

Unfortunately in some cases they are. Women live longer than men. In financial jargon, they have longevity risk. In 2011, nearly 57% of people age 65 and over were women. And those percentages increase every year. Nearly 60% of the 75 and older crowd are women and a whopping 75% of those 85 and above are, which means whatever women have financially has to last longer. And many women will be alone. An estimated one million women lose their husbands each year and will be widows for an average of 14 years.

 

And this is where the reality of the bag lady fear kicks in. Being single can be financially damaging. And far more older women are alone than men. 56% of women 65 and older are single, whereas only 29% of men over 65 are alone. According to Urban Institute Research, while only 4% of married women over 65 fell below the poverty line in 2010, that number rose to 14% for widows and 18% of divorced women over 65. The poverty numbers are much less for single men. Clearly living longer alone puts women at greater financial risk. Add all of these facts together and you can see why women have some very different retirement planning needs than men, which is why we have asked two women, who are experts in retirement planning, to give us some advice.

 

Mary Beth Franklin is a WealthTrack regular, part of our informal WealthTrack brain trust and the go to person on all matters regarding social security. She is contributing editor at InvestmentNews, the leading trade publication for financial advisors. For many years she was senior editor at Kiplinger’s Personal Finance magazine and editor of its annual retirement income issue. Erin Botsford is founder and CEO of the award winning financial planning firm The Botsford Group. She has been named to Barron’s magazine list of “The Top 100 Independent Financial Advisors” and “The Top 100 Women Financial Advisors” and is the author of The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time, which was published last year. I began the interview by asking the key question: what is different about retirement planning for women?

 

MARY BETH FRANKLIN: I think most women will live very long lives, and people always underestimate how much money they’re going to have or income they’re going to need for perhaps 30 years in retirement. So it’s really important to think about retirement now.

 

CONSUELO MACK: Longevity. What else, Erin?

 

ERIN BOTSFORD: Well, I think that the vast majority of women have not taken the lead role in their financial planning. A lot of times they’ve paid the monthly bills and they’ve been responsible for that, but they haven’t taken that next step to prepare for, you know, the investment portfolio and things like that.

 

CONSUELO MACK: So when clients come to you, a couple comes to you, is it usually the man who has basically handled the investments…

 

ERIN BOTSFORD: Yeah.

 

CONSUELO MACK: …and the long-term financial planning for women?

 

ERIN BOTSFORD: Yeah, pretty much. It seems like they do divvy up the chores. She will pay the monthly bills, because he travels a lot with his business, or whatever, but he takes care of the investments. They think that’s a good way to, you know, assign the tasks. So they both are involved in it, but she doesn’t have as much confidence on the investment side, and he doesn’t have a clue where the money goes.

 

CONSUELO MACK: It’s interesting. There are all sorts of psychological differences, too. I mean there have been studies that have shown that women, for instance, are much more risk averse or conservative about investing. They’re also much more security conscious as well. So in order to talk to us, to get us involved in our retirement needs, I mean how important is the psychological aspect to this as well?

 

MARY BETH FRANKLIN: I think it’s critical, and I think what Erin has brought up is that so many women basically run their households, the day-in and day-out cash flow. If women could think of retirement as future cash flow, I think it would be a lot less intimidating. And that’s basically what it is, particularly in Erin’s book, where she talks about preparing for retirement is figuring out how much it costs to live and matching up your investments or sources of income to cover those needs.

 

CONSUELO MACK: Right, The Big Retirement Risk: Running Out of Money Before You Run Out of Time. But it’s so interesting, because I know, Erin, one of the things that you’ve emphasized in your book and in your advice to your clients is that don’t think about the number. And I can remember older people that I know thinking about, “Well, I’ve made a million dollars; therefore, I’m set for my retirement.” You’re saying don’t think about the number. Think about that cash flow, that budget that you need to fund. And is that something that women, that’s a natural thing for them to think about? Is that an emphasis that’s easier for women to think about?

 

ERIN BOTSFORD: Well, it should be, because they’ve been doing it most of their adult life. They usually do pay the bills, or have something to do with it. But I think in the overall mainstream financial advice giving, you know, both men and women, income or cash flow in retirement hasn’t been the emphasis. It’s been about that big number, accumulating that balance sheet number, the net worth. So I think there needs to be a change in the structure. And it really is, like she said, it’s really a continuum of what’s already been happening.

 

CONSUELO MACK: Priorities for women, how different are they for women than men?

 

MARY BETH FRANKLIN: Oh so much, where do you start? Behaviorally, there is a big difference for those women who do invest, whether through their 401(k) plan at work or on their own. Yes, they do tend to be more conservative, less risk adverse, but studies often show because they are long-term investors that they often do better than men, who tend to turn their investments, jump in and jump out of the market. They also say that during this recent economic downturn, men tended to be angry, and they wanted to get back at the market. And they would often jump in and they would sell things that went down, and then it turns out what they had sold actually went back up. Women were more fearful and consequently more respectful of their investments. And when they work with advisers, they tend to ask more questions, and what they want mainly is tell me how much you’re charging me, what am I getting for that money, and explain to me what this investment is. Don’t push a product down my throat. Explain to me the strategy of why I should invest, and once I understand that and I’m comfortable with it, I’ll do it and I’ll stick with it.

 

CONSUELO MACK: Oh. So women will ask some of those tough questions that a guy might not be willing to, because he’s gone to an expert, and, therefore, he’s just going to leave it in their hands. Is that right?

 

MARY BETH FRANKLIN: Do men ask directions for anything? It goes across the board. Now, what’s interesting is a lot of women, there’s a lot of studies that women would like to work with female financial advisers, but when you look at the number of financial advisers, only about 25, 30% are women. There are a lot of potential women investors out there that would like to work with a woman advisor. So I think we’re going to see that end of the industry grow for the next few decades.

 

CONSUELO MACK: So Erin, as far as the basic needs that we have and that you’ve mentioned in your book, that we should focus more on funding our needs, as opposed to like getting one dollar amount for retirement, but are the needs of women, for instance, are they the same as they are for men or are they different?

 

ERIN BOTSFORD: I would say not. It’s quite humorous when you actually are dealing with men and women in the same conversation. I always say that men, all they need is a big-screen T.V., and a remote control, and a bag of chips on, you know, a cardboard box, and they’re happy.

 

CONSUELO MACK: So that’s what they want to fund in their retirement.

 

ERIN BOTSFORD: That’s their need, they think. And if it’s a 50-inch, you know, big-screen T.V., that’s all they need. And really, it is that sort of mentality, because men seem to have this hunter-gatherer mentality. They’re really not afraid of losing it all, because remember, you know, they were born to go out and hunt, and gather, and bring it home, and heck, you know, if they lose it all, they can go out and get another job, or find a way to bring home the bacon. Women, as Mary Beth said, they’re the caretakers, the nesters. Women are afraid of ending up being a bag lady under some highway, you know. So their needs are very different. They have the need for security. They want financial security. You know, their basic needs are housing. I mean women tend to want to pay their home off. Men are okay with having a mortgage. You know, the food, the shelter, women want the health insurance. They want the best plan. So they’re willing to pay a little bit more for it. Men, they want Vegas money. I mean it’s just a difference…

 

CONSUELO MACK: Mentality.

 

ERIN BOTSFORD: It’s a different DNA. And it’s quite fun to see the differences. But it’s pretty universal.

 

CONSUELO MACK: So… go ahead.

 

MARY BETH FRANKLIN: I think you’re right that women particularly are concerned about their longevity. So they’re more likely to be willing to buy long-term care insurance, say, than the man. And she really needs it, because she’s probably going to spend a lot of time taking care of him, and there’ll be no one left to take care of her. So something like long-term care insurance is a need for a woman.

 

ERIN BOTSFORD: Right.

 

CONSUELO MACK: So, also, as far as priorities are concerned, I mean we can kind of laugh about the big-screen T.V., but it’s no laughing matter when you’re planning for your retirement as to what is an essential for a woman versus a man. So what are the essentials that women should recognize that, look, these should be priorities for you. What are the things that we really need to think about?

 

ERIN BOTSFORD: We call them nonnegotiable items. And really, the needs are shelter, food, the ability to sustain their environment, you know, pay their electric bills, all of their insurances, you know, and health insurance, and long-term care.

 

CONSUELO MACK: So those are the nonnegotiable items, which actually sound like they’d be the same for guys, too. But then the next level, which again is part of your financial planning, Erin, in your book, The Big Retirement Risk, the next level is your wants. And so is that where you start seeing a real separation between men and women?

 

ERIN BOTSFORD: Yes. Yeah.

 

MARY BETH FRANKLIN: I’ll let you take that.

 

ERIN BOTSFORD: Yeah, probably so. Those are the interesting conversations, because is dining out, vacations, manicures, pedicures, internet, cable, you know, country club memberships, really, those are interesting- like, my husband and I, country club membership, that’s a need for my husband. I don’t even go there. So that’s definitely not a need for me, but really, that’s been a basis of some conversation. Do we really need that? How much are we spending every month? And do we need it into retirement? Well, certainly, in retirement, you have to have that. So there just is a different way that they view things.

 

MARY BETH FRANKLIN: Do you find couples get into an escalation race? Well, if you feel like you need the country club, then I definitely need …

 

ERIN BOTSFORD: The manicure, pedicure.

 

MARY BETH FRANKLIN: The need list gets a lot longer and a lot more expensive

 

ERIN BOTSFORD: Plus it seems like women tend to want to make sure that their grandchildren and their children… so their needs have to do with their extended family members a lot more than a man might have.

 

MARY BETH FRANKLIN: But, I think where I see a real difference in men and women, men may be a little bit better about planning for the finances of retirement. Women are better planning how they’ll spend their time. I’m not sure why that is. You know, a lot of men have been defined by their jobs, and a lot of them can’t wait to stop working, and then it’s “Now what?” And women, you often see this complete reinvention. They go back to school. They start a business. They get involved in a charity or a non-profit. So retirement is not just about spending money. It’s about spending your time.

 

CONSUELO MACK: Are the funding needs different than for men and women, Erin?

 

ERIN BOTSFORD: No, not really. I think when it comes to the basic nonnegotiable items, the needs, if they’re going to live together, there’s going to be those basic items, and they’re going to have to agree to some extent. It’s really the wants. And so those are the discussions that are really interesting, and sometimes, I mean it comes down to, “I don’t think you need that,” and he says, “I don’t think you need that,” so you split the money down the middle, and they get to fund what they want on the wants. So she decides she doesn’t want to cook, she wants to eat out, and he’s perfectly happy with a peanut-butter-and-jelly sandwich, you know. So that’s kind of, it’s where they have to meet in the middle if they’re going to sustain, you know, life together.

 

CONSUELO MACK: Right. We started out this conversation by saying that women live longer. So that tells me that women need more money, or to Erin’s point of view, if you want to think about the income you need, that you’re going to need more income. And, therefore, should women’s investment planning be even more guaranteed to generating more income? Is that a difference that you would make?

 

ERIN BOTSFORD: I don’t think any more than men. I mean yes, you do have longevity issues with women, but sometimes that can be made up. Let’s say the husband has a life insurance policy. He dies, and, you know, that gets cashed in. That money can be deployed to fund more income solutions. So sometimes that happens. That’s the one thing I don’t like to see, is when people retire that they give up all of their life insurance.

 

CONSUELO MACK: Well, tell me about this. Why do they do that?

 

MARY BETH FRANKLIN: That’s an interesting concept, because the old idea of life insurance was you had it when your kids were little, so that if anything happened, survivors could pay off the mortgage and send the kids to college. So, traditionally, once you got into your mid-fifties, a lot of people just gave up their life insurance. They may have had it with their employer, but once they retire, it was gone. I’m starting to see more 50-plus people either keeping their life insurance or buying it, because they look at their kids, who have lived through this recession, and say they will never have what we have, and I want to be able to provide for my adult children. So we’re seeing an increase of life insurance among the 50-plus purchasers.

 

CONSUELO MACK: So let’s talk about some of the products that women really should seriously consider as must haves. So what are they? What are some of them?

 

ERIN BOTSFORD: Of course, health insurance, to make sure they’re both covered. Long-term care insurance. And keeping a life insurance policy on a spouse and a husband is very important, because if you do exhaust some of the family resources, because he gets sick, or he has to go into a nursing home, at least, you know, you’ll have the life insurance to help with that longevity risk that women, you know, have more than men.

 

MARY BETH FRANKLIN: I think this is another reason why couples really need to look at their Social Security claiming strategies of how to maximize this source of guaranteed income that will last as long as the second spouse is to die. So it’s very important to get the biggest benefit possible, particularly for the main breadwinner, which may mean delaying until 66 or 70, because if he dies first, which is likely, then his surviving spouse will get 100% of what he had during his lifetime. And for so many very elderly women, Social Security is their only source of income. You should think of your Social Security benefits as just like a part of your retirement portfolio. It’s a very important decision that can, you know, provide a critical source of income that you won’t outlive.

 

CONSUELO MACK: What are the biggest mistakes that women make in planning for their retirement?

 

ERIN BOTSFORD: Well, one, they don’t take an active role soon enough. And sometimes it’s, you know, the husband is either ill or he dies.

 

CONSUELO MACK: When they get involved, right?

 

ERIN BOTSFORD: When they get involved. And then they feel completely, you know, ill-prepared. If they would start earlier… and, you know, the younger generation is not having this issue. Those women, those couples, they cook together, you know, they clean together. They do their finances together. It’s really our generation that we’re seeing, and the older generation where women just didn’t get involved as much. And so I think that there’s no time like the present, which is why I wrote my book, to give the women the empowerment to make some of these decisions, at least not be so fearful about what’s out there. Because, you know, fortunately, it’s really not rocket science.

 

CONSUELO MACK: So we’ve talked about some of the essentials, and that is, obviously, health insurance, maximizing your Social Security benefits, certainly thinking about, you know, income-producing vehicles. So what about annuities? I mean besides Social Security, what are the other investment vehicles that we should look into that will provide you the income that you need for life?

 

ERIN BOTSFORD: I break annuities down into four different categories, really. And I explain them in my book this way. There are what I call immediate annuities, or pension annuities. And I like them for, let’s say you’re an older woman, you’re by yourself, and you have X amount of dollars. And generally speaking, you know, the older you are, the more income you’re going to get, and it’s going to last the rest of your life. I think those are ideal. Immediate annuities for older single people overall. Then there’s fixed annuities, which is just like a CD, and probably has the same rates as a certificate of deposit. Then, there’s variable annuities. I like those that are tied to the market, where you can actually get some raises over time. And then there’s the equity indexed annuities, which if people want principal guarantees for money that they can use in the future, I like those as well. So I think it’s the insurance world, of all the products Mary Beth and I were talking about, both of us used to not like annuity products.

 

CONSUELO MACK: Right.

 

ERIN BOTSFORD: But things have changed dramatically, and I think these annuity products are getting better and better. And instead of people just disregarding them as a whole asset class, I think people should start doing their investigation of them.

 

MARY BETH FRANKLIN: We’re going to have a whole new discussion on another type of annuity, something called longevity insurance. How that works is, say you’re 65 and you’re retiring. You take a small chunk of money and you give it to an insurance company and say, “Start paying me when I’m 85.” So that’s 20 years from now. Because it’s so long from now, it doesn’t cost a lot of money, and would pay you every month the rest of your life as long as you live.

 

CONSUELO MACK: Starting at 85.

 

MARY BETH FRANKLIN: Starting at 85. I like to call it the roulette wheel of insurance, because if you die before 85, you don’t get anything. That’s the reason it’s so cheap. But it’s a great idea, because 85 is about the time when your other money might be gone. It may be the time when you start needing long-term care. You can use this money for anything. It doesn’t have to have a designated purpose.

 

And the hardest thing in financial planning is figuring out how long your money’s going to last, particularly when you don’t know when you’re going to die. This says your money just has to last till 85, and then you’ve got another source of income. So it’s been a concept that the academics have loved, because it makes so much sense, and I never thought consumers would ever buy it. But the fact that the Administration has stepped up and said, “This could be a good idea.” One of the stumbling blocks was, when you have money in a retirement plan, once you hit 70-and-a-half, you have to start taking money out and paying taxes. Well, think about that. How would you do that if the insurance plan doesn’t start paying off until 85? So what the Treasury said is, under certain circumstances, we’ll say you don’t have to take that required minimum distribution until this insurance starts paying out, around 85. That is going to lift all sorts of roadblocks, and I think it will be a product of the future.

 

CONSUELO MACK: So it’s time for the One Investment for long-term diversified portfolio, what is the one thing that every woman planning for her retirement should think about?

 

ERIN BOTSFORD: Okay. My answer is, I have two. One, focus on income. Okay? Begin with the end in mind. Focus on income, not capital appreciation. And they have to shift that mindset, because everybody still wants to grow their money, and they want to double it. So focus on income. And, two, buy long-term care insurance, especially buy it on your spouse. Because you’re going to be the one that lasts, you know, probably longevity. You’re going to last until you’re 85. You want to make sure that there’s enough money if your spouse, you know, has to go into a long-term care facility, or you need a nursing home. I’ve had a lot of people diagnosed with early Alzheimer’s recently. That’s devastating. I’ve had clients that they’re having to drop their husbands off at daycare and they’re going on trips and cruises by themselves or with their girlfriends. So you want to have that insurance that’s going to provide that daycare or that away care, so that you can continue on your life, because this person may be in this condition for a long time. It’s not fun to talk about, but it’s the reality of our time.

 

CONSUELO MACK: Right. Mary Beth, what would yours be?

 

MARY BETH FRANKLIN: That women particularly learn about Social Security benefits, because this could be the one source of income that’s going to last the rest of their lives, and timing is everything. Don’t just claim it as soon as you can. It may not be the right decision. But consult some of the tools, like socialsecuritysolutions.com, or the AARP.org calculator to educate yourself about what the options are, and how to maximize the benefits for yourself, for your spouse, and even if you’re divorced or widowed, there’s options for you.

 

CONSUELO MACK: So Mary Beth Franklin, always a treat to have you here, contributing editor for InvestmentNews. And Erin Botsford, you run your own financial planning group, but you also have a great new book out called, The Big Retirement Risk: Running Out of Money Before You Run Out of Time. So thanks very much both of you for joining us.

 

MARY BETH FRANKLIN: Thank you.

 

CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week we have two recommendations for you. The first is: read Erin Botsford’s book, The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time. What’s different and refreshing about Botsford’s approach is what she calls lifestyle driven investing which redefines retirement planning in terms of your personal lifestyle and needs.

 

The second Action Point is: identify and maximize some sources of income for life. The most obvious place to start is with social security. In a recent InvestmentNews column, Franklin warns that even Social Security Administration reps sometimes get claim information wrong, so it’s extremely important to do your research and know which claiming strategies you can use to maximize your payouts. Franklin recommends the website, socialsecuritysolutions.com and we will have a link on our website.

 

Next week we visit with a Great Investor who has spent over half a century successfully finding income. Legendary Loomis Sayles bond fund manager Dan Fuss will join Financial Thought Leader, strategist and portfolio manager Richard Bernstein to discuss what to do with your stock and bond portfolios in these changing markets. Incidentally we will have another discussion with Franklin and Kim Lankford of Kiplinger’s Personal Finance magazine about the changing conversation on retirement income. Both believe the next big thing for retirement is insurance. They will discuss the role annuities can play in filling in the retirement income gap.

 

If you have missed any of our past Great Investor or Financial Thought Leader guests you can find them on our newly revamped website, wealthtrack.com. Next week we will have an extended interview with Richard Bernstein about his career transition from top investment strategist to successful money manager. Thank you so much for joining us. Have a great weekend and make the week ahead a profitable and a productive one.

 


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