Widowhood: The Overlooked Retirement Risk

As baby boomers enter their 60s, a new generation of women is beginning to retire. Many boomer women have worked outside the home, saved their own money for retirement and earned pension benefits from their employers. But their goal of a financially secure retirement may still be difficult to achieve.

Planning for retirement is hard; no one really knows how much money they will need to maintain the lifestyle they want for 20 to 40 years after leaving the workforce. It’s a difficult question because the answer depends on many things that will happen which no one can control, such as future inflation rates, future tax rates, long-term investment performance, the need to pay medical and nursing home expenses, family financial emergencies and length of life.
More risk in retirement

Retirement is not a gender-neutral stage of life. A 2006 study by The Society of Actuaries points out several reasons why women generally have more risk in retirement:

● They live on average 3 years longer than men.
● On average, they start their retirement saving later (by 2 to 4 years).
● Because many women serve as caregivers to other family members, they are in and out of the workforce more often and thus may give up their jobs or miss out on promotions, wage increases and pension or retirement plan contributions

Unmarried women

Single and divorced women can’t rely on anyone else to help them through retirement. They have to do the retirement planning and saving themselves. They may need to save more, work longer, invest more aggressively or reduce their retirement goals.

Married women

Retirement planning is seemingly easier for married women. In addition to their own assets, their husbands may have assets that can be used to pay expenses and produce income they can both spend. In reality, retirement planning for married women can be quite complicated. Their planning may need to consider 2 sets of assets, retirement dates, life spans, and different opinions on future goals, needs and spending. Widowhood is a retirement risk often overlooked.

The retirement savings of married couples may have to last for a long time. A LIMRA study published in 2005 notes that many people underestimate their life expectancy. Few understand the concept of joint life expectancy or recognize that life expectancy changes as they get older. With a married couple, both aged 70, there is an 88% chance that one will live beyond the male’s life expectancy and a 77% chance of living beyond the female’s life expectancy. They should consider setting an inflation-adjusted income target for 25 to 30 years. The probability of a wife surviving her husband means she has a greater risk that the remaining retirement assets will not be large enough to provide for her.

The role of life insurance

Life insurance coverage can be a critical component of a women’s long term financial security. Single women may be able to purchase a policy insuring a parent or sibling. Or, they can use cash value policies on themselves to grow tax-deferred funds that may be used for retirement income.

A married woman who survives her husband can’t know in advance how much of the retirement assets will remain for her to use. If the husband dies after an extended illness that creates medical or nursing home expenses, their retirement assets may be completely drained.

A life insurance policy insuring the husband can serve as a cash reserve to replace some of the lost assets. The income-tax-free policy death benefits can provide cash to shore up the widow’s finances. These death benefits can act as a “financial safety net” to maintain the widow’s financial security and peace of mind. A life insurance policy can provide a margin for error if their retirement plans don’t work out as anticipated.

Most husbands want their widows to be financially secure. When they understand the risks their wives face, they are usually open to insuring themselves to protect their wives’ financial freedom and standard of living. If they are insurable, they can feel good that they did what they could to provide a financially solid future.

There is no guarantee that the husband will die first. Sometimes, the wife is the first to die. If the husband bucks the odds and survives his wife, there are a variety of things he could do with the policy. He could use it to provide an inheritance to the children, donate it to his favorite charity, surrender it or sell in a life settlement.

Husbands sometimes object that they have the same potential risk if the wife becomes ill. Her medical expenses and nursing home costs could deplete their assets and leave him in financial difficulty. If he’s concerned enough, the husband should consider purchasing a life policy on her.

The stakes in retirement planning are potentially higher for women than they are for men. Married women in particular must walk a financial tightrope in planning for and living through their golden years. Events that take place after they retire can directly impact their quality of life and they may be powerless to do anything about it.

If they become widows, they may need a cash reserve to recover from unexpected losses. Life insurance is an excellent tool for bolstering the finances of the surviving spouse and securing a reasonable lifestyle for her or his remaining years.