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Women and Retirement Security; Pensions and Other Retirement Instruments

by Betty Soldz

 
"The reality is that poverty for women in old age too often begins the first day they enter the workforce. When they make decisions about the kind of job they will hold, it appears that the majority of women fail to factor in the consequences the decisions will present when they retire."

The State of Older Women in America, Owl (OWL: The Voice of Midlife and Older Women)

Money, or the lack of it, affects us throughout our lives. When we are over sixty, it plays an even greater role in how and where we live and a whole spectrum of choices in our daily lives. It is never too late to start planning as long as one is still employed but the best time to plan for retirement, so that we are secure in older age, is when we first start working. It is also the time to become knowledgeable about pensions and other retirement vehicles.

Rebecca, age 65, is retiring but she does not have a private pension in addition to social security. She is one of the 60% of women without a pension. In fact, the majority of working women remain outside the private pension system today.

Women who lack private pensions do so for a variety of reasons. They traditionally move in and out of the labor force. Even those women who are covered by a pension plan may never actually qualify to receive pension benefits because they will leave their job before they are fully vested in their employer's plan. (Vesting is the term used to refer to the date at which an employee acquires a non-forfeitable right to receive benefits from a pension plan.) The majority of women who are employed still tend to work in jobs that have low rates of pension coverage or work in part-time jobs that do not offer benefits.

In 1997 only 15% of women working part-time and one-half of women with full time jobs were likely to have pension coverage. This left more than half of all women without a private pension. These women, like Rebecca, will have to rely on Social Security in the hope that it will keep them out of poverty or they will need to use other retirement vehicles such as 401Ks or IRAs to help toward retirement security. Although the number of women with pensions has increased in the last few years, women with low salaries have low rates of pension coverage.

Women should have a strategy for their retirement from the time they enter the labor market but starting now is not too late. Begin by becoming financially literate. Becoming informed about retirement planning requires access to appropriate information and understanding available options. The following paragraphs will cover some of the possible options

In the past, most workers were covered by employer sponsored plans known as Defined Benefit Plans. These plans guaranteed a specific benefit amount based on factors such as employee's age at retirement, salary and years of service. The employer funds this type of plan and the payment of benefits is guaranteed by the Federal Pension Guarantee Corporation. The employer's pension administrator controls investments and bears the risk of the investments. This kind of plan guaranteed a steady stream of income throughout the years of retirement, though subject to inflation rates, unless the company has a cost-of-living provision.

Over the past few years there has been a shift by employers toward Defined Contribution Plans such as 401 (K) plans or for the employee to build her own pension by investment vehicles such as IRAs. This is largely a voluntary system with limited, if any, employer contribution. The final payout will depend on how much is invested and the success of the investment. The government does not insure this type of income.

Defined Contribution Plans may include employer contributions, employee contributions or a combination of both. When workers contribute a portion of their salary to the plan they defer income tax on these contributions and the interest earned on the account until the money is withdrawn for retirement income. (Withdrawal must start by age 70 according to a set formula or there will be a tax penalty). However, many low-income, part-time workers cannot afford to contribute to these plans and they generally require employees to contribute before the employer will contribute anything.

A Defined Contribution Plan does not offer the security of a defined benefit plan because it does not guarantee the amount of benefits one will receive. In other words, defined contribution plans such as 401K or 403b (defined contribution plans for employees of educational or non-profits groups) give individuals the opportunity to save for retirement but they require that one assume more of the risk of investment decisions. This year the contribution limit to a 401K or 403b plan and some other retirement accounts is $11,000 and people 50 and over will be able to add an additional $1,000 to their account under a new "catch up provision."

You can also open an Individual Retirement Account (IRA) which is a retirement savings plan in which individuals can contribute up to $3000 per year to an eligible plan offered by banks and brokerages, etc. Under most circumstances the contributions are tax deductible. However, if you make withdrawals before age 59 there can be a very stiff financial penalty. (Withdrawals must begin by age 70 . ) The Roth IRA is a relatively new type of IRA in which one can contribute up to $3000 annually but this contribution is not tax deductible on your tax return. The advantage to this type of IRA is that you will not owe tax when you begin withdrawing your funds upon retirement and you are not required to start drawing down your funds at age 70 .

Another important thing to know when planning for your financial security is that Social Security and pension benefits many times are integrated (the employer subtracts part of an individual's Social Security benefit from one's pension) so that people only receive one amount. Furthermore, federal and other private studies have shown that between 13 and 20 percent of all pensions are calculated incorrectly.

You may want to contact the Administration on Aging Pension Counseling Project with such questions as: has my pension been correctly calculated?; my spouse recently died and his employer told me that there were no survivors benefits—is this correct?

You may have other pension questions. The phone number for the pension rights center in Washington D.C. is (202)296-3776 . For more information you may call the AoA at (202)619-0724. The center will counsel and assist older individuals with filing claims and complaints related to pension and retirement benefits. It can also provide information, counseling, assistance and referral regarding pensions and other retirement benefits with special emphasis on women, minority, rural, and low-income retirees.

Pensions are just one part of financial security in retirement along with social security and savings. These are sometimes referred to as the 'three legged stool.' In order to be secure in the later part of your life, it is important not to neglect any of the legs of the stool. The earlier you start learning what kind of pension is available to you and what job and financial changes you can make, the more options you will have to prepare for a secure retirement.

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