Michael Edwards
When Donna Swartz's husband died, she found herself immersed in a sea of financial decisions.

The day George and Donna Swartz's custom-built 34-foot yacht was dropped into its slip in La Conner, Wash., was supposed to mark the glorious start to a retirement they would spend cruising the Pacific Coast. But instead of celebrating, the couple were reeling from the diagnosis of metastatic melanoma that George had received the day before. "We knew immediately that George had only months to live," says Donna, now 66. "He asked if I wanted to sell the boat, to make things easier for me. When I said no, George said, 'Good, because I don't want to sell it either.'"

Donna's decision that June day in 2005 not only meant that the couple could enjoy a maiden voyage to Canada a few weeks before George died but also signaled her readiness to begin thinking about life on her own after 42 years of marriage.

Why It's Different for Women

Donna Swartz's situation is not unusual — in fact, it's one that many women will ultimately face, considering how likely they are to outlive the men in their lives. According to the Society of Actuaries, the probability of two spouses, each age 65, surviving to age 90 is 29% for the woman and only 16% for the man. Other women, who have divorced or never married, also find themselves on their own in their later years. Today just a third of women between the ages of 75 and 84 live with their husbands — and for those 85 and older, that number drops to only 13%, according to What Women Need to Know About Retirement, an economic guide for women published online by the Heinz Family Philanthropies and the Women's Institute for a Secure Retirement (WISER).

The prospect of controlling the family finances for years, or even decades, should underscore the need for foresight and preparation. But female retirees say they're often preoccupied with immediate concerns and are inclined to look ahead only five years or so, according to a 2009 report, The Impact of Retirement Risk on Women, co-authored by the Society of Actuaries and WISER. "Women tend to manage many competing and immediate priorities. They are frequently involved in running the household, raising the kids, helping aging parents and having a career," says Bill Hunter, director of Personal Retirement Product Management at Bank of America Merrill Lynch. "All of that may get in the way of thinking about retirement, even though research makes it clear that planning in general is very important to women," Hunter adds. "When you're accustomed to thinking about everyone else, it can be difficult to start thinking about yourself."

Planning ahead becomes even more urgent for women who leave the workforce to raise children or assist a family member, a move that significantly reduces their 401(k) savings and Social Security benefits. So whether women get started early or late, it's critical that they plot effective retirement strategies that reflect the realities of life in retirement.

The New Decisionmakers

Though she had worked on and off in her husband's business for years and raised two sons, Swartz was now faced with a different set of challenges. Immediately after George died, she had to retitle in her own name the assets the couple owned jointly — a task made more complicated by the fact that she had been a recent victim of identity theft. It took a while, almost a year, before she was ready to step back and take a longer view of her financial future. That's when she repeated a six-week seminar on women and investing taught by her Merrill Lynch Financial Advisor, Carmen Portnoy. "Carmen suggested that I take the course when George and I first became clients, but now I was taking it with a new perspective," says Swartz. "From now on, money decisions were going to fall to me alone."

The two worked together to create a financial strategy that made sense given Swartz's circumstances, while also allowing her the opportunity to travel and have free time in retirement — both important goals to her. To help Swartz in the transition to the life she now wanted to lead, Portnoy suggested she consider selling a property the couple had bought years earlier — and which now took a considerable effort to manage.

Having a thoughtfully designed retirement income strategy like Swartz's is always important, but perhaps especially so for women. Facing the more likely prospect of life on their own, they have a number of concerns — many of which are different, at least in degree, from men's. Chief among them: Sixty-three percent of affluent women say they are anxious about the longevity of their retirement assets, compared with 52% of men, according to the Merrill Lynch Affluent Insights Quarterly (AIQ) released in January.

According to the 2009 Society of Actuaries and WISER report, there are other differences in how women and men look at financial assets. Men, for example, are more likely than women to consider the equity in their homes as a resource to fund retirement. Women, on the other hand, tend to think of the home itself as a source of financial security, a place to live when their husband is gone. Women also expect their retirement expenses to increase as they get older, because they anticipate more years of physical decline than men do.

Gearing Up for a Long Retirement

Making money last through retirement is a key topic of conversation when Margaret Weglinski, a 51-year-old anesthesiologist at Mayo Clinic in Rochester, Minn., speaks with her Financial Advisor, Ginger Carson, of Carson Bushman & Associates. "As a single woman, I depend on Ginger as someone to bounce ideas off of," says Weglinski. "I don't have another income coming in, and in some ways, that's a good thing because it makes me responsible for financial decisions — I'm not going to find them suddenly sprung on me after a divorce or when a spouse dies. And I don't have children, so no one will be there to take care of me later in life. That puts more pressure on me to make the right financial choices now."

To prepare for the long term, Weglinski maximizes annual contributions to her retirement plan at work and has bought tax-deferred annuities that she can tap in retirement. One particular concern for her is taxes, which have the potential to eat into her retirement assets, particularly if rates rise in the coming years. Carson's team has addressed this issue, suggesting that Weglinski convert a traditional IRA to a Roth IRA and that she pay taxes on the money in the account now, when tax rates currently remain low.

"Withdrawals from a Roth generally are tax-free, so when Margaret needs funds for a major trip or another big expense during retirement, she can tap the Roth," says Carson, who notes that converting to a Roth IRA may also make sense for a couple anticipating a time when the woman could be on her own. Adds Hunter: "If untaxed assets in a Roth are allowed to compound over many years, they can generate substantial tax-free income during a woman's longer lifetime."

Faster Track to Growth

Of course, how much assets grow depends on how they're invested. For women, striking the right balance between risks and potential returns is particularly challenging because they tend to have a lower tolerance for risk. "Compared with men, women are generally much more conservative investors," says Portnoy. She adds, "And because they generally earn less, it can be harder for women to recover from investment losses."

Michael Edwards
Swartz took a six-week class on women and
investing taught by her Merrill Lynch Financial
Advisor, Carmen Portnoy.

On the positive side, women aren't as likely as men to overmanage their portfolios, tending instead to buy and hold their investments for longer periods. Because of that, they generate fewer trading fees and, on an annual basis, they record better returns than men, according to a landmark study, Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment, conducted by two University of California, Davis, finance professors. Even so, being too cautious in their risk tolerance and asset allocation could make it difficult for them to keep up with the rising cost of living during retirement. "During the past 50 years, the dollar has lost 90% of its purchasing power," says Portnoy. "And the longer you live, the greater the share of your assets that will be consumed by inflation," which averaged 3.5% annually from 1980 through 2009. "That's why women should consider some exposure to equity markets — to pursue the growth that can allow them to outpace inflation."

To get that exposure, both Weglinski and Swartz have purchased variable annuities — which have optional benefits available at an additional cost — that can let them lock in guaranteed minimum payments for life, while offering an opportunity for growth if the stock market moves higher. "Instead of just maximizing my assets and making withdrawals during retirement, I was seeking an income for a long period," Weglinski says.

Hunter also points out that another source of retirement income — Social Security — amounts to a kind of annuity, and that there are tactical approaches for optimizing its benefits. For example, a husband and wife who retire at the same time may want to draw on the Social Security benefit of the lower wage earner and postpone the second Social Security benefit for a few years, because every year of deferral beyond normal retirement age, up to age 70, results in a higher payout, with the surviving spouse continuing to receive the higher of the two Social Security benefits.

One Step Ahead of Health Care

The specter of long-term health care, which has the potential to knock even the best-laid retirement plans out of whack, looms particularly large for women. Seventy percent of affluent women say they're concerned about paying for medical expenses during retirement, according to the AIQ — and with good reason. If a woman is younger than her husband, much of the couple's savings could end up paying for his medical or long-term care, especially because men are statistically more likely to experience age-related, chronic illnesses before women do. However, because women live longer, they are liable to develop disabilities at later ages, with greater medical costs overall. And if they live alone, they may have to pay for care at home or in a nursing facility. "Women will need more years of nursing care — 3.7 years on average — than a man, who will need an average of 2.2 years," says Hunter, citing statistics from the Department of Health and Human Services. The Society of Actuaries and WISER study finds that the lifetime cost of long-term-care services for men averages just $29,000, compared with $82,000 for women.

Purchasing long-term-care insurance is an option, although the premiums can be expensive and can jump dramatically from year to year. Those who already have chronic illnesses may also be denied coverage. Swartz has decided against purchasing a long-term-care policy because she owns several investment properties that could be sold if she needs nursing home services. And, after hearing Portnoy's advice, Swartz decided to use her lifetime exemption from gift tax — capped at $1 million through 2010, it is $5 million in 2011 and will remain the same amount for 2012 — to move money into an irrevocable life insurance trust. The trust purchased an annuity whose income pays the premiums on a life policy, the proceeds from which will cover the estate taxes when Swartz dies. She also set up college savings plans for her grandchildren, making yearly gifts that reduce her taxable estate.

Michael Edwards
Margaret Weglinski is carefully arranging her financial life in retirement
so that she can spend more time traveling and volunteering.

The Liberating Years

Retirement for women, many of whom may be on their own for the first time in decades, can be a time of redefinition and personal discovery. After years of putting a family's needs first, this can be an opportunity to pursue new interests — or old passions that have long had to take a backseat. "I tell Donna to enjoy herself," says Portnoy. "She has given her kids a lot, and she and George worked hard and saved to build their assets. Now this is her time."

How Swartz and other women choose to spend that time may be, once again, quite different from the paths that men would take. According to the AIQ survey, 86% of women want to spend time traveling during retirement, 74% are looking to enjoy hobbies, 64% say they will get more involved in their communities and 62% are interested in philanthropic work. In every case, the percentage of men planning to do such things is considerably lower.

Weglinski has already biked, hiked and camped at many national parks in the U.S. as well as throughout Europe. Her plan is to travel even more once she retires a decade or so from now. She also intends to resume her volunteer work at a local food bank, which she had to forgo when she couldn't make the hours mesh with her work schedule. But after spending 22 years on staff at the Mayo Clinic, Weglinski can't imagine quitting work cold turkey. "I would rather taper off gradually," she says. "If I'm able to work fewer hours per week, I may be able to work for a longer period of time and thereby maximize my earning power."

Travel is also a priority for Donna Swartz. Though she had visited much of the world with George, setting forth without him was a new experience. But a recent trip to South America helped her turn the corner. She decided to travel to Ecuador alone — the first time "there was no one else to take care of me in a foreign city" — and joined an excursion to the Galapagos Islands. "That trip made a profound difference in my feelings about how I will live the rest of my life," says Swartz. "Feeling that I'm on a good path has increased my confidence during this new phase of my life. I am constantly busy, doing charity work, spending time with my grandkids and taking my family to places like Egypt and to the potato farm in Idaho we've owned for generations. I used to think that when George died, I would have to take care of everything alone. But now I know better."