Prime Time (44 page)

With Gloria Steinem.

CHAPTER 18

Don’t Put Off Preparing for the Inevitable: One of These Days Is Right Now

One of the things I have come to feel … is that if you think you know what you’re going to be doing in five or ten years, you’re wrong. But if you don’t have an opinion on it, you’re in trouble. In other words, go toward the future with a plan that you’re willing to let go of.

—MARY CATHERINE BATESON

N
OW, IN THE FIRST HALF OF MY SEVENTIES, I REALIZE THAT MY future is right now, today, this very minute. Never has the expression “If not now, when?” been more relevant. Let’s not blind ourselves to the realities that lie just around the corner, realities that, with proper forethought, can be manageable—or, with denial, can make our last decades miserable.
One of these days I’ll make a will, start saving money, figure out what will happen if Bill dies first…
This Second Act thinking is a recipe for trouble in the Third Act. Backing out of the bedroom to avoid displaying a dimpled rump is one thing; backing into our futures is quite another! I hope younger women reading this book will begin to prepare for the future right now, when it can be easier and less costly.

“People generally overvalue the present and undervalue the future … and it’s very clearly a phenomenon that applies to decision-making about money,” writes Dr. Laura Carstensen in her book
A Long Bright Future: An Action Plan for a Lifetime of Happiness, Health, and Financial Security.
¹
“We’ll let our future selves deal with living on less so we can live on more now,” says Dr. Carstensen, the founding director of the Stanford Center on Longevity.

In an effort to see if virtual reality might be used to help people better relate to their older selves, researchers at the Center on Longevity work with young volunteers who don virtual-reality helmets, look into computer-generated “mirrors,” and see their own older self, their own avatar, looking back at them. Half the volunteers see themselves at their present age; the other half see themselves forty-five years in the future, bags, jowls, wrinkles, and all. The researchers then have the “aged” volunteers perform different interactive tasks with their avatar, and this appears to enable them to connect emotionally with their older selves. “At the study’s conclusion,” writes Dr. Carstensen, “participants are asked to decide how to allocate a $1,000 windfall. Interestingly, participants who see their older selves in the mirror allocate significantly more money to retirement.”

Not all of us can avail ourselves of this morphing technology, so we have to try hard to envision ourselves at, say, sixty, seventy, and eighty. Have we saved money? Possibly not. Only half of the older baby boomers are saving enough for a comfortable retirement. This is a serious dilemma for women, in particular, since older women are twice as likely to be poor as men. During our lifetimes, the one-paycheck family became less common. Women in ever-increasing numbers entered the workforce; many of those women have been widows and divorcees, and they weren’t working for “pin money.” These women needed to increase their Social Security benefits and maintain their health care coverage. But women start off earning only up to 81 percent of what men earn (often doing the exact same work), and, because we live longer, the effects of reduced benefits in an economic downturn are especially onerous for us. It’s a burden, particularly for the more than two million divorced women, who far outnumber the widows. In their book
Project Renewment,
Bernice Brattner and Helen Dennis write, “The annual median income for women 65 and older is about $3,000 above the Census definition of poverty, or $11,816. Ninety percent of all women, at some time in their lives, will be totally responsible for their own financial welfare.”
²

Financial Planning

Ask yourself these questions: Do you have investments, and how much are they likely to earn for you? What benefits—your own or your husband’s—will support you? If you are married and your husband has a private pension, has he elected to provide survivorship coverage for you? If he has a 401(k) retirement plan at work, are you sure you are named as the beneficiary? Similarly, are you the beneficiary of any life insurance policies on your spouse? Has he told you that you will inherit “everything” in his will—but created a trust that keeps you from making withdrawals without permission from his estate-planning attorney, who will act as trustee?

Believe me, all of these things happen to smart women who think they will be provided for upon a spouse’s death!

Have you discussed these matters with your husband or has he told you, “I’ve got everything under control”? Maybe yes, maybe no, but you have a right to know. Our income in our seventies and eighties may determine our outcome.

Women may be single by choice or by circumstances. But since women live longer, the odds are that we will live our later years on our own. It’s worth thinking about and planning for right now.

Draw up a baseline budget that you will need to live on when you stop working. Include in it the cost of long-term care should you need it, and start right now figuring out how you’re going to fund it.

One of the best books about financial planning for your retirement that I’ve read is
The New Savage Number: How Much Money Do You Really Need to Retire?
by Terry Savage.
³
I often urge friends to buy and read it. When Terry says that within every woman there is a secret fear of being a “bag lady,” you know she is talking to you. (Terry’s website is
www.terrysavage.com
.)

Savage says that there is easily accessible and inexpensive help for planning your retirement. Let me summarize a few of her points about the key issues: You need to start saving, and investing to increase your savings. Then you should carefully plan your withdrawals from your savings after retirement
so you don’t run out of money before you run out of time.

THREE QUESTIONS

Terry Savage asks us to start our planning by answering three questions. They are basic but require you to put some starch in your spine and remove any blinders of denial.

1. How old do I expect to be when I die?
   
2. How do I rank the following three retirement solutions?
   
   • Working longer before retiring
     
   • Lowered standard of living in retirement
     
   • Saving more now
     
3. If I knew I could get trustworthy advice about how to save, invest, budget, and withdraw, would I be willing to confront the financial issues of retirement?
   

Terry’s first step is to help you get a realistic perspective on how long you’re likely to live. (You may be surprised, since women over age eighty-five are the fastest-growing demographic!) For some insight into the question of longevity, Savage sends you to a website:
www.Livingto100.com
. You enter information about your age, health, and eating and exercise habits, along with some information about your parents’ longevity, and you’ll get a personalized estimate of how long you might live. Once you’re armed with that information, Savage suggests going to
www.choosetosave.org
, a website created by the nonprofit Employee Benefit Research Institute. Click on the “Ballpark Estimate” tool for help in determining how much you should be saving, given your earnings and your lifestyle and when you hope to retire, so your standard of living doesn’t drop sharply when you stop bringing home a regular income. Using this online calculator, it’s easy to see the impact of working longer, contributing more, changing your investment style, or a combination of those variables.

You may discover that you are unable to save more or that your investments aren’t bringing in big enough returns to give you a secure retirement. In that case, you may have to consider working longer hours now or continuing work for more years to allow your nest egg to grow. Or perhaps you can convince your company to keep you on part-time. Older workers have enormous things to teach incoming, younger workers. Research shows that companies that make it possible for older workers to stay by rearranging hours, creating new job descriptions, and so forth, wind up earning more profit. Or you might investigate the possibility of using your skills—computer, sales, management, leadership skills—for salaried work in a nonprofit organization. Or go into teaching your skills to other people.

Monte Carlo Modeling

When you’re approaching retirement, you’ll need some advice about how to invest with less risk (since you will no longer be making big contributions to your retirement plan) and how much money you can safely withdraw every month so you can make your money last as long as you do. For that kind of planning, simple averages or casual guesswork just won’t do.

Savage explains the strangely named Monte Carlo modeling process, a sophisticated computer program that takes in all your answers to a detailed questionnaire and models multiple alternatives to come up with investment and withdrawal strategies for your retirement years that have a high probability of meeting your goals. The Monte Carlo process can also be used if you’re younger; it will show you, among other things, how much you should be saving, whether you are investing appropriately, how much money you can afford to take out every month, how inflation will affect your savings, and what your income goals should be.

“Monte Carlo modeling goes far beyond the law of averages,” says Savage. “It illustrates the range of probabilities so that you can observe the trade-off between risk and return.”
⁴
Monte Carlo modeling is available at a number of leading financial services firms. Which firm may be appropriate for you depends partly on whether you are in what Savage calls the “accumulation phase” or the “withdrawal phase.”

THE ACCUMULATION PHASE

You are in the accumulation phase if you are still working, still trying to save, or still contributing to a retirement plan at work. If this is the case, Savage says, “Your company 401(k) retirement plan (or 403(b) savings plan for non-profits) isn’t the only place you could be saving. If you’re self-employed or own your own small business, you can set up a Keogh plan, an IRA, a SEP-IRA, or an individual 401(k) plan. These plans differ in their contribution limits and in whether those contributions are made by the employee or employer.” You can find definitions and instructions for opening these accounts at any major mutual fund or brokerage website because they also offer the mutual funds and stocks to make your retirement plan grow.

“It can be difficult to force yourself to save, so the trick is to do it automatically—to have the money taken out of your paycheck before you see it and spend it,” notes Savage. But the really tough part is deciding how to invest that money, how much risk to take, which investments to use, and how to maintain a disciplined approach to your investments even when the stock market is plummeting. For that you need professional help—and it doesn’t have to be expensive. Many of the nation’s largest employers offer 401(k) investment advice to their employees through independent services.

FINANCIAL ENGINES
(
www.financialengines.com
). Savage likes this firm’s modeling services for those who are still in the accumulation phase. It includes modeling for your tax-deferred accounts, your non-tax-deferred accounts, employee stock options, and multiple goals. You are asked to fill out an extensive questionnaire that asks about your financial matters as well as your goals. Financial Engines is an independent firm that receives no fees for its buy-and-sell recommendations. You simply follow the suggestions to switch investments among the funds in your company plan.

But you need different advice—and investment choices—as you enter retirement. Savage advises that you not leave your money in your company 401(k) plan after retirement because your firm’s type of investments are more suitable for the accumulation phase than for the withdrawal phase; also you have no choice over the investment decisions. In addition, many company IRA or 401(k) accounts require immediate distribution of the funds when you die, which prevents your heirs from spreading out distributions and delaying taxes on withdrawals. She suggests instead that when you retire you roll your company 401(k) plan into an individual retirement account (IRA). And then be sure to name a beneficiary for the account.

THE WITHDRAWAL PHASE

The withdrawal phase is just what it sounds like: the time when you have fewer if any earnings beyond your investments and you have to carefully prioritize what you spend: Do you get a new car or a new dress, or downsize your home?

SOME SOURCES FOR MONTE CARLO MODELING

T. ROWE PRICE
(
www.troweprice.com
). T. Rowe Price Advisory Services was one of the first to use Monte Carlo modeling. It sees the accumulation and withdrawal phases as integrated parts of the advice process. It advertises itself as offering a top-performing and diverse group of mutual funds and providing individualized investment advice. The service is available to company retirement plans and to individuals who pay a fee ($250 as of this writing) for the initial analysis and annual updates. You do not need to have an investment with T. Rowe Price to use this service.