This is the first blog post in a three-part series about single women and longevity risk. In this article, we’ll explore why independent women are most at risk of outliving their financial resources.
One of the reasons long-term financial planning is important is to minimize longevity risk, or the risk of outliving your financial resources. Longevity risk is generally brought up in connection with retirement, since the risk of depleting your savings increases once you stop working.
With advances in healthcare and increasing life expectancies, longevity risk is becoming an increasingly relevant concern for many retirees. Unfortunately, single women are among those most at risk of outliving their resources due to a variety of factors.
#1: Women Live Longer Than Men
First, women tend to live longer than men on average, which means they may need to support themselves financially for a longer period during retirement. According to a 2021 CDC study, the average life expectancy for women in the United States is 79.1, while for men, it’s 73.2.
However, using an average statistic to determine life expectancy and longevity risk can be problematic as each person’s family, health history, and lifestyle differ. Fortunately, the Social Security Administration (SSA) has a life expectancy calculator that can help you better understand your likelihood of living past a certain age.
For example, a 45-year-old woman’s life expectancy today is 85.4 years. But if she lives until age 70, her life expectancy increases to 88.9.
#2: Single Women Face Unique Financial Challenges
Second, single women often face unique financial challenges, such as lower average incomes. According to the U.S. Department of Labor, women working full-time and year-round make 83.7% of what men earn in similar jobs.
In addition, women are more likely than men to experience a gap in employment due to caregiving responsibilities, which can interrupt their earning and saving potential. The Covid-19 pandemic exacerbated this disparity, as women’s participation in the workforce tumbled disproportionately in part due to increased childcare responsibilities as schools and daycares closed.
Given these challenges, women tend to save less than men on average, further contributing to longevity risk. In fact, a recent T. Rowe Price report found that women tend to contribute less annually to workplace retirement accounts than men and have meaningfully lower account balances.
#3: Women Tend to Invest Less Often and More Conservatively Than Men
According to data from Morningstar, women tend to invest less and hold a larger percentage of cash than their male counterparts.
Studies show that this is largely due to a lack of confidence. For example, Fidelity’s 2021 Women and Investing Study revealed that only 19% of women feel confident in their ability to choose investments that align with their financial goals.
Unfortunately, this lack of confidence often translates to smaller nest eggs in retirement, increasing longevity risk. Consider the following example.
Suppose you invested $1,000 in the U.S. stock market 30 years ago, at the beginning of 1993. Over the next 30 years, the S&P 500 generated an annualized return of 9.7% before accounting for inflation.
That means at the end of 2022, you would have had $16,074 if you reinvested all dividends. Had you kept this money in a savings account that yielded an average of 1% over the last 30 years, you’d have about $1,347 at the end of the same period.
Thus, investing is necessary for single women to minimize longevity risk and outpace inflation, so your dollars don’t lose value in retirement.
How Single Women Can Address Longevity Risk
To address longevity risk, engaging in proactive financial planning is essential. This includes:
- Saving and investing. It’s crucial to start saving early and regularly contribute to retirement accounts, such as 401(k)s or IRAs, to accumulate a sufficient nest egg for retirement. Within investment accounts, include stocks for their above-average growth potential and diversify your investments to mitigate market volatility risks.
- Estimating retirement expenses. Assess your expected expenses during retirement, including healthcare costs, housing, and daily living expenses. This evaluation can help determine how much you need to save to ensure a comfortable retirement and reduce longevity risk.
- Social Security planning. Understand how the Social Security system works and develop a strategy to maximize your benefits. Consider when to start claiming benefits and spousal or survivor benefits if applicable.
- Long-term care insurance. Evaluate the potential need for long-term care insurance to protect against the high costs associated with extended care services. Research different policies and assess your options based on your health, family history, and financial situation.
- Health and wellness. Prioritize maintaining good health and adopting a healthy lifestyle. Being healthy can contribute to a longer and more active retirement, reducing potential healthcare expenses and increasing overall financial security.
By being proactive and mindful of longevity risk, single women can take steps to secure their ongoing financial well-being.
Part 2: The Importance of Investing for Single Women to Offset Longevity Risk
Although single women face a variety of unique challenges and risks when it comes to financial planning, there are steps you can take to manage these risks and achieve your financial goals. In Part 2 of this blog series, we’ll dive deeper into why it’s so important for single women to invest when it comes to minimizing longevity risk.