Retirement Planning for Singles Can Be Tough but Fun

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Retirement planning for single people is in some ways simpler than retirement planning for couples, but it can also bring its own challenges. Joining me to discuss some of them is Nancy Coutu. She is a principal for Money Managers Group Limited. It's in the Chicago suburbs.

Nancy, thank you so much for being here.

Nancy Coutu: Thanks for having me, Christine.

Benz: About 45% of the population is single, never married, or divorced. Let's talk about that cohort of single women. I often hear from single women who are doing their own financial and retirement plans. Let's talk about some of the challenges that confront people who fit that description, whether they are divorced or single and never married.

Coutu: The one gain is if they, let's say they are still working. They are going to earn less, they as a result save less, their benefits are going to be less, their expenses and lifestyle might have to substantially lower than their friends or relatives or someone that has two incomes coming in in the household. They have to plan for that. They have to know their budget. They really do have to know. I have a lot of single women and men and we go over the budget every year. What has changed? Did your taxes go up? If they moved, what are the new expenses? It's going through budget and making sure that, again, your resources for income will accommodate that budget.

Benz: I want to talk about maybe a more positive side of this. You just have one person pursuing her own goals, in some ways, is it kind of simpler that she can outline her vision for what she wants and then you can construct a portfolio and a plan that aligns with that vision. What are the positives for women in this position?

Coutu: Much more fun if you are, again, because our first step is to sit down and go through, you know, what are your goals, what are your goals and objectives, what are you doing now, what does everything cost now? But oftentimes I have to be the bad guy, too. She says, OK, so, now, I'm single, I'm going to move, I'm going to keep my house and rent it out to my kids who are living there right now, I'm going to educate my grandkids, I'm going to travel …

Benz: There is a long list of things that cost money?

Coutu: And it's wonderful and it's fun, but thank you, it costs money. We go through, OK, great, let's just see where we are at. Well, then we might come up with, well we are not going to be able to meet all these goals, which ones are the most important. And then we go back and prioritize. And then, we see if there's enough money for those.

Sometimes, it's pairing down those goals. Sometimes they are totally unrealistic. Sometimes they are extremely gratuitous. It's like, I want to educate my grandchildren, I want to help my church ... we are, again, caregivers and we also tend to be very generous without thinking of ourselves first. And it's you first. You have to, because these people won't necessarily step up to the plate to support you later on. My number one focus is keeping them on track you first, and then we will take care of all these other people if we can, but it's you first. I am the only one that can really tell them that. As the outside objective individual without family interference. It can be fun, and it could also be very complicated.

Benz: You referenced some of the things that can happen, and they might tend to adversely affect single people more than marrieds. One is some sort of job loss or something that would cause an interruption in income. When you think about strategizing for single women, do you counsel a larger emergency fund than you might have in place for a married couple where you have two incomes flowing?

Coutu: Yes. The single person should have three to six months of expenses somewhere in sort of easy-to-grab emergency fund, safer investment.

Benz: Shouldn't couples have that, too, of three to six months?

Coutu: They should have it, but typically both of them aren't going to be handicapped at the same time. You still have that other income coming in. So the three to six months isn't as critical for the two wage-earner household. But certainly, a emergency fund. I say now more appropriately credit cards can be an emergency fund if it's only going to be for a few weeks. I had my knee replacement. I'm going to be out of work for six weeks and I don't get any kind of benefit from work. You need to cover that six weeks. Well, it doesn't have to be with half a year of savings sitting in an account making nothing. It could be 30 to 60 days of money in that account and then use your credit cards. When you go back to work, pay off those credit cards.

Benz: Yeah. Because credit cards aren't ideal, right, as a source of emergency funding in that the interest racks up pretty quickly if you're not paying off.

Coutu: Right. A lot of people think that, well, they have equity in their house. A lot of people have their home paid off and they say, well, in the event of an emergency I can get a mortgage on my house. You cannot. If you don't have a job, there is not a bank that's going to give you a mortgage. It's a fallacy. No, you cannot fall back on that equity in the home. You are kind of stuck. You really need resources outside of that. And you might, for an emergency fund, have already set in place a line of credit that you could use against the equity of the house in the event of an emergency. That's another way. It used to be tax-deductible interest. Under new tax reform, it's only tax deductible if you use it for household expenses, remodeling or whatever. But it's still a wonderful source of an emergency fund with low interest payments that could be paid off relatively quickly as opposed to leaving money in an account making nothing.

Benz: Let's talk a little bit about Social Security planning. People who are widowed or divorced have the opportunity to take a Social Security benefit based on their spouse's work history. But let's talk about single women, so women who have never been married before. What are their options and how do you help them make good Social Security decisions?

Coutu: Again, it's a strategy. It's tricky. You really have to run the numbers. It's like sometimes a woman wants to retire, her plan is to retire, like, the 50-year-old retiring at 60, going to take her Social Security at 62.

Benz: And most people do take it at 62, the majority.

Coutu: And that's correct, yeah. We run the numbers and say, you can't do this because unfortunately, Social Security isn't going to keep pace with inflation. Even though you get an occasional raise, there's no guarantee of that. If inflation is averaging 4% and you get a 2% on average increase, that's a recipe for disaster. Oftentimes we are saying, no, you can't or shouldn't take it at 62. Wait until your full retirement age of 66, for example, or work longer or a combination of both. But you really need to crunch the numbers. You really need to do some planning and projection of the plan. Not just what it's costing now but projected over the next 30 years. A lot of people don't look at it full circle and they also don't take taxes into consequence. They have a large lump sum in their 401(k), and they think, well, I could easily pull out $5,000 a month. Well, to get the $5,000 …

Benz: After taxes it's less.

Coutu: … you might have to take $6,000. Illinois doesn't tax that, but other states tax that and some at 7%. So, you are dealing with federal and state tax once it comes out. You have to take out a much larger sum. All of that can be projected on paper before you make any financial decisions. I highly recommend that.

Benz: Last question for you relates to long-term care planning for single women. Is it more important for single women to have some sort of long-term care plan than would be the case for married partners?

Coutu: Yes, because they have no resources. First they rifle through all of their retirement savings and then potentially qualify for Medicaid. And especially, if she is widowed and has children, you might want to cover that aspect of long-term care planning because, yes, your children might step up and help you, but you would want them to do the fun jobs, not the nitty-gritty jobs of healthcare. Take you to the doctor, cook for you, run errands with you, but let a professional caregiver do the getting you out of bed and getting you showered and getting you dressed. That costs a lot of money. It's more appropriate to try and cover long-term care needs when you are young and healthy. And there are less and less companies that offer traditional long-term care.

Benz: Pure long-term care polices.

Coutu: Yeah. 20 years ago, there a couple of hundred companies and now there are not a couple of dozen companies. Insurance companies are getting out of that business because one out of every two people over age 65 are in need of some sort of long-term care. It's becoming a crisis and especially when 10,000 people a day are turning 65. The combination of that is really the perfect storm for disaster.

There are investments now that have enhancements for long-term care. There are the hybrid long-term care contracts that are available. Not everyone can afford them. But it's knowing what your options are. But definitely, sit down and look at the numbers while you are healthy and young.

Benz: Think through the variables and what might be the plan that makes sense for you.

Coutu: Yeah. Because if you are going to live a long time, you are going to get sick. And if you get sick, you are going to need help. That's the bottom line. You are not going to be able to take care of yourself. Who is going to do that?

Benz: Sobering message, Nancy. But thank you so much for being here to share these very practical tips.

Coutu: My pleasure. Thank you so much, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.