FROM WSJ.COM
Preparing for retirement is hard enough when two people are in it together. When you are on your own, it can be even harder.
Many Americans will head into retirement solo for different reasons, of course, including the death of a spouse, divorce and changing lifestyles. In the 2013 U.S. Census, some 54% of women 65 or over were unmarried, and 27% of men.
That is a lot of people, and their situations vary widely. But something senior singles tend to have in common, financial advisers say, is that their retirement-planning needs can be very different from those of married peers—and that many of them are unprepared.
In fact, a study by Rand Corp. says that single people are at much greater risk of not saving enough for retirement than married couples. The study, by researchers Michael Hurd and Susann Rohwedder, found that 20% of married couples won’t save enough for retirement, but that some 35% of single men and 49% of single women will enter retirement financially unprepared.
The reasons run the gamut. For one, there are more forces nipping away at their income and investible resources. For the newly widowed or divorced, advisers say that housing costs may jump as a proportion of income and that some income streams may become less predictable. A single person’s cost of living isn’t, as some might think, 50% of a couple’s. It may be 60% to 80% of a couple’s—or even the same—unless the single person reduces housing expenses significantly, perhaps by downsizing or living with a roommate—something AARP research indicates 40% of adults will consider.
Fewer Tax Breaks
In addition, singles often miss out on tax breaks (filing jointly, for instance) that are available to married peers. As they look ahead, advisers say, singles may also perceive a greater need to pay for pricey long-term care insurance in the absence of a spouse-as-caretaker, which can come at the opportunity cost of investment.
Fear of outliving their retirement savings is a common denominator for single women, who tend to outlive single men. It’s a concern frequently heard by Colin Drake, a fee-only certified financial planner with Drake Wealth in San Francisco.
Standard financial-planning models suggest that retirees can typically withdraw 4% of their portfolios starting at 65, adjusting the withdrawal upward over time for inflation, and not outlive their means, Mr. Drake says. For single women in retirement, he says, it may make more sense to start with a lower withdrawal—maybe 3.5%.
Tax experts add that single adults often face steeper tax challenges than their married peers, especially as they near retirement age. Without child tax credits, a spouse exemption, and no one with whom to realize the benefits of filing jointly, singles can take a pretty big tax punch during peak earning years.
“To lessen the tax bite, I advise my single adult clients who own their own businesses or have side businesses and freelance income to set up a solo 401(k),” says Dean Ferraro, an enrolled agent with Authoritax, a Mission View, Calif., company that prepares tax returns and represents taxpayers in IRS audits. Mr. Ferraro notes that 2014 contribution limits to solo 401(k)s are $52,000, and $57,500 for those over age 50. The contributions consist of a salary deferral (a maximum of $17,500) and a profit-sharing distribution (until the $52,000 or $57,500 limit is reached).
Singles have to be smart about planning for withdrawals from their retirement accounts once they’ve stopped working, experts say. While withdrawals from traditional individual retirement accounts are taxed as ordinary income, withdrawals from Roth IRAs aren’t taxed. For this reason, it can be wise for a single person to move a portion of funds into Roth products before age 70½. Because traditional IRAs require that adults begin withdrawing a minimum distribution (based on a percentage of total assets) at age 70½, retirees with substantial assets in a traditional IRA may be surprised at the high tax brackets.
Glenda Moehlenpah, a certified financial planner for Financial Bridges in Poway, Calif., tells of a couple that had socked away $3 million and assumed the wife would outlive her older husband. But when the man’s wife died first, his mandatory minimum IRA distributions and Social Security payments totaled more than $200,000 annually—more than he needed to live on—and incurred a bigger tax bill than they would for a couple. If he had converted a portion of those assets to a Roth 401(k) before 70½, Ms. Moehlenpah says, he might have owed less in taxes. It’s worth discussing with a tax adviser the possible benefits of a rollover and what the tax impact would be.
Dan Sudit, a Seattle-based financial adviser and regional market manager at BMO Private Bank, describes a similar situation in which a client with about $3 million in assets made a $500,000 Roth conversion before turning 70. Doing so lowered his required minimum distribution from the $100,000-to-$120,000 range into the $80,000-to-$100,00 range, and lowered his tax burden substantially.
Everyone’s situation is different, of course. Cindy Pestka, a 54-year-old regulatory-affairs manager at a Seattle-area medical-device company, has been single all her life and has saved consistently in employer 401(k) plans. She rents out a portion of her century-old Craftsman home for additional income, and isn’t planning to rely heavily on Social Security, which she estimates will account for 30% or less of her retirement income.
But despite her efforts, a financial adviser recently told her she might need to work longer than she’d planned—maybe to 72, versus her late 60s—to sufficiently fund her retirement years. She is now considering whether portfolio moves or downsizing could shorten her working years.
“I was very surprised,” she says. “I’d like to retire while I still have energy to enjoy my life.”
More Surprises
For retirees who are recently divorced, planners say, there can be other surprises as well. Assets like alimony and life-insurance policies become less reliable sources of income. Alimony designed to cover a former spouse for life, for example, may dry up upon the death of the former spouse who was paying. In addition, the owners of life-insurance policies determine who the beneficiaries are; thus, singles who don’t become owners on a shared policy may find themselves without benefits if an ex changes the beneficiaries.
There can be overlooked benefits for divorcées, however. Many don’t realize they may be eligible to receive an ex-spouse’s Social Security benefits, for example, provided the marriage lasted a decade. The divorced spouse can do this even if the ex has remarried, and with no impact to the ex’s benefits.
Ms. Moehlenpah says such a strategy can provide bridge income that can help defer collection of Social Security benefits, and thus increase the benefits that one receives. Indeed, some people choose to delay collecting their benefits until age 70.
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