Take control of your future
Women and retirement
January 8, 2007
I have known Bita and Afshin for over twenty years. We all went to high school together. Bita and Afshin were childhood friends and started dating in high school. They went to college together and got married shortly after graduation. The other day though, I got an email from Bita telling me that she and Afshin are getting a divorce and it’s anything but amiable. There are many issues of contention, among which is Afshin’s retirement accounts. Although equally educated, because of their children, the couple had decided from the onset that they could live on Afshin’s salary alone.
So, Bita became a stay-home wife and mother, while Afshin worked outside the house. Now, with the pending divorce and the division of the couple’s property, Bita [correctly] believes she is entitled to half of it, including Afshin’s retirement account. Afshin is headstrong and thinks the retirement account is his sole and separate property, as that term is understood under California Community Property laws. Unfortunately for Afshin, because the benefits accrued while the couple was married, his retirement account is actually their community property, and each spouse is entitled to an equal share of the proceeds.
Bita’s email got me thinking, how many other couples out there are going through this exact same thing, and that got me thinking about writing this article. After all, how many of us generation “X-ers”, “Y-ers”, both better known as the “Boomerang” generation are even thinking about retirement? We are still in the prime of our life and retirement seems so far, far away. However, it’s never too early to start saving for retirement and as many of us know, Social Security will barely cover the basic minimum assuming it will still be there when it’s time for us to retire.
As many of us know, retirement planning is no longer a male-only responsibility and everyone should make long-term plans for retirement. However, women may want to pay special attention to when and how much they save for their later years. The Department of Labor’s Bureau of Labor Statistics reveal that more than fifty percent of the U.S. workforce is now female and on average, women live longer than men. A woman retiring at age 55 can expect to live another 27½ years, whereas a man can expect to live another 19 years. Consequently, women end up needing to accumulate more income to carry them through their retirement years.
Savings can increase a woman's chances of having enough money to last during her retirement. Unfortunately though, of the 60 million wage and salaried women working in June 2002, just 47 percent participated in a retirement plan. Moreover, although choosing carefully where you put your money and learning how to make your investments grow is a good idea, women tend to invest too conservatively, more so than men and thus receive lower rates of return from their investments over time.
Furthermore, women are more likely to work in part-time jobs that don't quality for a retirement plan. Finally, working women are more likely than men to interrupt their careers to take care of family members; they work fewer years and contribute less toward their retirement. If you work and if you qualify, join a retirement plan now. Start saving early because you have time on your side. Your savings will grow and your earnings will compound over time.
Remember, even small amounts can earn interest and add up over time. So, take control of your retirement and keep the following points in mind when you’re planning your financial future:
- Join your employer’s retirement plan.
Most employers offer a retirement plan not only to attract better- qualified individuals, but also because they received certain tax benefits. If your employer offers a pension or retirement plan, join it as soon as you’re eligible and contribute as much as the plan allows. Most employers with a 401(k) plan match a percentage of the employee's contribution. This match is at least 50 percent of the investment in many 401(k)’s. That's like getting free money! While all job categories may not be included in your employer’s plan (those of part-time or temporary workers, for instance), your job may be one that is, so check with your Human Resources Department.
2) Have your rights vested?
Vesting simply means have you worked long enough at the job to earn the right to benefit from a savings or pension plan. Often employees, especially women, quit work, transfer to another job, or interrupt their work lives just short of the time that is required to become vested. Your eligibility to earn a pension is determined by the duration of your employment with the company. For instance, in some companies, you have to work for 5 years to become eligible to receive pension benefits. Some workplaces have a shorter vesting period like 3 years. Again, check with the Human Resources Department about your company sponsored plan’s vesting schedule.
3) Keep copies of the documents that define the provisions of your pension plan.
In addition to asking questions of company or pension plan officials, you should keep copies of the summary plan description (SPD) and any amendments. The SPD is a short document that pension plan administrators must prepare and distribute to all plan participants. The SPD outlines your benefits and how they are calculated. The SPD also spells out the financial consequences, usually a reduction in benefits if you decide to retire early, which is earlier than age 65 in many plans. You probably received a copy of the SPD when you joined the pension or savings plan, but most likely it is buried along with all the other papers that you were given during orientation. Don’t fret, because you can always request another one from your employer or plan administrator. Also remember to keep pension-related records from all jobs. They provide valuable information about your benefit rights, even when you no longer work for a company.
4) Changing jobs.
You may lose the pension benefits you have earned if you leave your job before you are vested. However, once vested you have the right to receive benefits even when you leave your job. In such cases, the company may allow, or in certain cases may insist, that you take your pension money in a lump sum when you leave. However, other companies may not permit you to receive your pension money until retirement. The rules for your plan are spelled out in the SPD.
A word of caution: If you receive your pension in a lump sum, you will owe additional income taxes, (federal, state and local) and may owe a penalty tax. A better way is to reinvest your savings in another qualified pension plan or an Individual Retirement Account (IRA) within 60 days. You avoid tax penalties and you keep your long-term retirement goals on track.
If you do want to reinvest the money, it is important that you do not directly receive it. If you receive the money directly, you will have to pay a 20 percent withholding tax on the amount you receive and then file for a refund in the next year, providing proof that you have transferred the funds to an IRA. Instead, instruct the pension plan to transfer your pension money directly to an IRA you have established or to another qualified pension plan. This is easy to do using simple forms supplied by the new plan. If you want help with the forms, representatives of the plan are generally available to assist you.
5) You can save for retirement even if you don’t belong to an employer-sponsored pension plan.
Anyone receiving compensation, or married to someone receiving compensation, can contribute to an IRA. In addition, if you are self-employed, you can start a Keogh plan, a Simplified Employment Plan (SEP), or a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE).
As with other retirement savings plans, there may be tax consequences, and possibly penalties, if you withdraw your savings early.
6) Track your Social Security earnings.
More women than ever work, pay Social Security taxes, and earn credit toward a monthly income at retirement. These earnings can mean some income for you and your family in the form of monthly benefits if you become disabled and can no longer work. If you die, your survivors may be eligible for benefits. In addition, you may be eligible for Social Security benefits through your husband’s work and can receive benefits when he retires or if he becomes disabled or dies. Special rules apply if you and your husband have been employed and both have paid into Social Security. Special rules also apply if you are divorced, or if you have a government pension. You can calculate your benefit estimate by visiting the Social Security Administration’s Web site.
7) If you divorce, you may be entitled to a portion of your spouse’s pension benefit.
As part of a divorce or legal separation, you may be able to obtain rights to a portion of your spouse’s pension benefit (or he may be able to obtain a portion of yours). In most private-sector pension plans, this is done using a Qualified Domestic Relations Order (QDRO) issued by the court. Consult your spouse’s pension plan administrator to determine what requirements the QDRO must meet.
8) Know the rules that govern your pension plan and the pension plan of your spouse if either of you dies.
The rules are different for defined contribution and defined benefit plans.
A defined benefit plan, which is a traditional pension, ensures the participant a specific monthly benefit at retirement and may state this as an exact dollar amount. Monthly benefits could also be calculated through a formula that considers a participant’s salary and years of service. A participant is generally not required to make contributions in a private sector fund but most public sector funds require employee contributions. Unlike defined contribution plans, the participant is not required to make investment decisions.
Some advantages of Defined Benefit Plans are that they a) guarantee retirement income security for workers, b) offer cost of living adjustments, c) pose no investment risk to participants, and d) do not depend on the participant’s ability to save, and best of all are a tax deferred retirement savings medium.
The drawbacks of Defined Benefit Plans are that they are somewhat difficult to understand by participant and are not beneficial to employees who leave before retirement
A defined contribution plan provides an individual account for each participant. The benefits are based on the amount contributed and are calculated by the participant’s income, plan expenses and market gains and losses. Some examples of defined contribution plans include 401(K) plans, 403(b) plans, employee stock ownership plans and profit sharing plans.
Advantages of Defined Contribution Plans are that they are a) tax deferred retirement savings medium, b) participants have a certain degree of control on how much they choose to contribute c) can be funded directly through payroll deductions d) lump sum distributions may be eligible for special 10 year averaging e) participants can benefit from good investment results f) are more easily understood by participants than Defined Benefit Plans.
The disadvantages of Defined Contribution Plans are that it is more difficult to build a fund for those who enter the plan late in life and 2) participants bear the investment risk.
Defined Benefit Plans
If you or your spouse belongs to a defined benefit plan (a traditional pension plan), the surviving spouse may be entitled to receive a survivor benefit when the enrolled employee-spouse dies. This survivor benefit is automatic unless both spouses agree, in writing, to forfeit the benefit. Check the SPD or consult with the plan administrator about survivor annuities or other death benefits.
If you are a beneficiary under your spouse’s defined benefit pension plan, protect yourself by requesting a copy of the SPD and other plan documents that describe your spouse’s vested benefits. Make the request in writing to ensure you receive it, but note too that you may be charged a fee for the information.
Defined Contribution Plans
The rules may be different if you or your spouse participates in a defined contribution plan. Consult the plan administrator for details about spousal rights. Planning and saving for retirement may seem like goals that are far in the future. Yet saving, especially for retirement, should start early and continue throughout your lifetime. So, if you are going to take away anything from this article, it should be this: 1) Get started now. The most important thing to do is to begin an investment program, regardless of how much you invest. Make savings a priority, and you could be on your way to greater financial security. 2) Review your portfolio regularly. Don’t invest and forget, and make sure you are well diversified in stocks and bonds, not just overly invested in conservative options like fixed income funds. Comment
Bianca Zahrai, Esq. is the Chief Financial Officer at International Alliance in Service and Education in the San Francisco Bay Area. She is also an ERISA and retirement Consultant and Lecturer. She has written extensively on ERISA and retirement matters and is a frequent contributor to various publications.