WM Quarterly :: First Independent

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Women and Retirement

According to the most recent figures available from the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration, of the 59 million wage-earning and salaried women working in the U.S., only 47% participate in a company retirement plan.

Part of the explanation may be that women’s employment patterns are different. They are more likely to work in part-time jobs that don’t qualify for retirement plan coverage, or to work fewer years in plan-covered employment because of interruptions in their careers to take care of family members.

It’s a bit ironic because, on average, a female retiring at age 55 can expect to live another 27 years, four years longer than a male retiring at the same age, and, therefore, needs to save more to cover those extra years.

The DOL offers a checklist of items for women to think about and act upon with regard to retirement plans and planning. A summary of its 8 main points:

1. Coverage
If your employer offers a retirement plan, join it as soon as you can and contribute as much as the plan allows. Many employers who provide a 401(k) plan will match a percentage of the employee contribution. As a result, when the match is figured in as part of your investment return, it’s very likely that the rate that you earn will be higher than the rate that you might receive from other investments. Don’t procrastinate. By saving early, you have time on your side. Your savings will grow, and your earnings will compound over time, tax deferred. Only upon withdrawal of your money will you owe tax.

2. Vesting
In many companies you may have to work a specified period of time in order to be eligible to receive benefits. Once you have satisfied the time requirement, your benefits will have “vested,” meaning that you will have worked long enough to earn the right to receive them. Too often, says the DOL, employees, especially women, quit work, transfer to another job or interrupt their work lives just short of the time required to become vested. Ask the personnel office or plan administrator about the vesting period and other details of your company plan.

3. Recordkeeping
In addition to asking questions of company or plan officials, you should keep copies of the summary plan description (SPD) and any amendments. The SPD is a document that plan administrators are required to prepare. It 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. You probably received a copy of the SPD when you joined the plan. But, if you can’t locate it in your files, you may request another one. Also remember to keep plan-related records from all jobs. They provide valuable information about your benefit rights, even when you no longer work for a company.

4. Change of employment
You may lose benefits that you have earned if you leave your job before you have 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 insist, that you take your money in a lump sum when you leave. However, some companies may not permit you to receive your money until retirement (some pension plans, for instance). The time when you can receive your benefits is spelled out in the SPD. A word of caution: If you receive your money in a lump sum, you will owe income tax, and if you are not at least age 55 or 59 1/2— depending upon the circumstances of your separation from employment—a 10% penalty. You avoid the tax and penalty by rolling over your payout from the plan to an IRA. The transfer of the money from the plan to the IRA should be direct from plan to IRA in order to avoid a 20% withholding tax.

5. Alternative retirement plans
You don’t have to work for a company that offers a retirement plan to get the benefits of tax-deferred savings. 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 Employee Pension (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. Social Security
More women than ever work, pay Social Security taxes, and earn credit toward a monthly income for their 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 both you and your husband have been employed and both have paid into Social Security. Special rules apply also if you are divorced, or if you have a government pension. Each year the Social Security Administration sends you a document that provides you with information about the benefits to which you may be entitled. You can calculate your estimated benefits by going to ssa.gov.

7. Divorce
As part of a divorce or legal separation, you may be able to obtain rights to a portion of your spouse’s retirement benefits (or the spouse may be able to obtain a portion of yours). In most private-sector plans, this is accomplished with a qualified domestic relations order (QDRO) issued by a court. You or your attorney should consult your spouse’s plan administrator to determine what requirements the QDRO must meet.

8. Death
Are you aware of the rules that govern your plan and the plan of your spouse if either of you dies? The rules are different based upon the type of employer plan. If you or your spouse belong to a defined benefit (pension) plan, the survivor may be entitled to receive a survivor benefit when the enrolled employee dies. This survivor benefit is automatic unless both spouses agree, in writing, to forfeit the benefit. You will need to check the SPD or consult with the plan administrator regarding survivor annuities or other death benefits. The rules may be different if you or your spouse participate in a defined contribution plan [a 401(k) plan, for example]. Again, consult the plan administrator for details about your rights.

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Financial Perspective: Looking for Income in an Uncertain Market

As investors ponder what may lie ahead for the financial markets in 2012, they should maintain a keen awareness of the environment in which we find ourselves. After a volatile year in 2011, several major uncertainties remain squarely in focus: the European debt crisis, whether the US economy can continue its recent improvement, whether the Federal Reserve will implement another stimulus program, and the state of China’s economy.

In a challenging environment such as this, finding some degree of certainty becomes important. Investors may therefore want to shift their focus from one part of the investing equation to the other. Investment returns consist of two components: capital appreciation and income. When it comes to investing, many people tend to think of buying the next hot stock and watching it surge higher to give them capital appreciation. But income - the less exciting, though more stable, component of investment returns - can help investors weather volatile and uncertain markets.

One only has to look at last year’s performance of the S&P 500 to find a powerful example of how important income can be. The index took investors on a roller coaster ride in 2011; in the third quarter it posted its worst quarterly loss in nearly three years, and then followed that dismal performance by soaring in October to its best monthly gain in 20 years. The S&P 500’s 30-day historical volatility at one point rose to its highest level since the financial crisis, and 2011 also saw many more days of 1% or more gains or losses than in the past. As if that wasn’t enough, on August 9, the index surged 6.5% over the last hour and 15 minutes of trading. That matched the biggest monthly gain the index has posted since late 2010.

Yet for all the whipsaw movements, the S&P incredibly ended the year almost exactly where it started. The index opened 2011 at 1,257.64 and finished the year at 1,257.60, and so was virtually unchanged for the year. So unless you were able to perfectly time when to buy and when to sell the market last year – and studies have shown that attempting to do so is futile and often a sure fire way to lose money – you had 0% capital appreciation. But on a total return basis, meaning capital appreciation and dividend income, the return on the S&P 500 was 2.11%. Granted that isn’t much, but keep in mind the index as a whole includes a wide range of stocks, some of which pay little or no dividend and others which pay a high dividend yield. So overall these stocks averaged out to a total return of 2.11%, but a focus on stocks with more attractive dividend yields can provide more income. A longer term view also demonstrates the importance of income: in early January, economist A. Gary Shilling noted that since its 2000 peak, the S&P 500 lost 18%, but was up 2% when taking into account dividends.

But income doesn’t have to come solely from dividends; bonds of course also provide income. And while Treasury bond yields remain near record lows, they do not represent the entire fixed income market. Other sectors include corporate, mortgage, federal agency securities, international, emerging market and municipal. Each sector has its own characteristics and fundamentals that differentiate it from the others and which help investors determine which of these work best for their particular needs.

Although income can be important in the current uncertain environment, this is not to suggest that capital appreciation has no place in an investor’s long term plan. Stocks, as well as bonds to a lesser degree, can also offer the potential for capital appreciation. (But keep in mind that stocks and bonds can fall in value as well.) Investors just need to remain flexible and be willing to adapt to the current market environment. As always, they should seek the particular mix of equities, bonds and other assets that best fit their own situation, but given the current state of the world, they may want to give income a closer look.

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Strategic Asset Management

With a Revocable Living Trust

Developing a sound investment management strategy is more than allocating assets and diversifying among the various asset classes. It is also about attaining your financial goals in life. The long-term security of your family is likely to be a key goal. To reach it, you want to ensure that your assets will continue to grow—providing the income that your loved ones will need to live comfortably, should you not be able to provide for them. And one of the most valuable resources available to help you achieve that goal of long-term financial security is a revocable living trust.

Living trusts: the facts
A revocable living trust allows you to arrange for the management of your assets both while you are alive and after you are gone. By establishing your trust now, you may be able to reduce the stresses and strains that your family may experience when they are forced to make difficult financial and investment decisions after you’re gone.

Think of a trust as a container, a place where you can transfer your securities, real estate or other property. This transfer is accomplished by making the trust the new owner of your assets. However, you retain control while you live, and you can direct what happens to the assets after you are gone, or are unable to make the necessary decisions about their management. These instructions are contained in a trust agreement that will be implemented and administered by the trustee that you name to oversee the trust.

Neither the instructions in the trust agreement nor the trust itself need have a permanent life. The directions that you give today may be altered in any way, at any time. The trust itself, if necessary, can be revoked, and your assets transferred back to you.

A strategy designed to your specifications
Your trustee will serve as the manager of the trust’s investments. When you name a corporate trustee, such as our institution, we can assist you in developing the strategy that will best serve you and your family, based upon your personal circumstances. For example, we will review your long- and short-term objectives, your risk tolerance, liquidity needs, tax considerations and a host of other variables in order to make certain that the investment choices made match your needs and expectations.

When we assist you in formulating and developing an investment management
strategy, you may delegate to us in the trust agreement the authority to execute all of the investment decisions. Alternatively, you can require us to submit recommendations for your approval. In all cases, as trustee, we will be responsible for all the paperwork and chores associated with the management of your assets.

Here’s an added benefit, and it’s an important one: By setting up a living trust now and naming us to serve as your investment manager, you can “preview” our performance. By observing our actions now, you will have the peace of mind of knowing that you will be leaving a capable, knowledgeable investment advisor to serve your family later.

Just in case
If you haven’t yet made the decision to integrate an “active” living trust into your current financial plans, you may want to look at an alternative—a standby trust.

A standby living trust offers you the opportunity to achieve a high degree of protection for yourself and your family should you become ill or incapacitated. Yet you maintain total control of your investments. The trust is activated only when you are unable to manage your investments, and only for as long as necessary.

In addition, the trustee can be directed to use the trust’s assets to pay household bills and taxes, for example. At a time when your loved ones are apt to be burdened by concerns other than financial ones, they will have the confidence of knowing that professionals are managing the family’s finances in your absence.

Additional protection: an estate planning strategy
When you establish a living trust, you designate two types of beneficiaries. There are the income beneficiaries (typically, yourself and your spouse), who receive regular payments of the trust’s income or principal as outlined in the trust agreement. At the termination of the trust—at your death or some other specified time—those whom you name as your remainder beneficiaries will receive the assets in the trust. But the trust may continue beyond your lifetime, and become an integral part of your estate plan. There are good reasons for coordinating a will and a living trust.

A living trust can operate as a highly efficient organizational tool, providing a unified approach to the management of your assets. For instance, assets such as the proceeds from a life insurance policy or a retirement plan may be paid to a living trust that you have established and which, at your death, becomes irrevocable.

As a result, you can ensure that your family will have a continuous, uninterrupted flow of income. In addition, you can set up an orderly distribution plan for your assets, either over a certain number of years or keyed to certain circumstances.

Finally, having all of your assets “under one roof” will make it easier for your spouse and other beneficiaries to keep track of how the family’s assets are being managed and to know where to turn with questions or concerns.

Additional benefits
At your death the assets in your living trust will not be subject to the potential delays and costs associated with the probate process. In addition, although the terms of your will can be made public, a trust is a private document and, generally, escapes public scrutiny.

This latter point can be especially important in the event that you become disabled and cannot manage your financial affairs. Contrast the privacy of a standby living trust, which springs into action immediately and without fanfare, with the potential for publicity, time and expense when formal conservatorship proceedings must be commenced in a probate court setting.
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