Black Enterprise, October 2003

If you go to WIFE.ORG, the Website for the Women’s Institute for Financial Education, you’ll find a bevy of financial advice and an opportunity to get a free bumper sticker with the slogan: “A man is not a plan.” Some may think it’s feminist jingoism. However, the maxim means much more. It’s a clarion call for women to develop a solid plan to secure their financial future and not to leave that responsibility to their husbands or significant others. Whether you’re married, single, or divorced, the responsibility for your financial life rests with you.

Single With Children;When Everyone Is Counting on You
Single mothers must face the challenges of providing for the present while planning for the future

Sandra Thompson, 50, is part of a growing trend: she is a single mother by choice, not by circumstance. In 1995, Thompson decided she was financially secure enough to care for a child on her own. She adopted then 3-year-old James through the One Church, One Child organization in Los Angeles. “I always hoped to be married and have children, but then I realized that I was getting older,” she says with a smile.

Thompson, who is adopted, earns $ 48,000 as a music professor at the University of Central Oklahoma. Each month, she allocates $ 200 directly to her 403(b) account and places $ 150 in a teachers’ retirement fund that is matched by the university. Currently, she has about $ 100,000 saved for retirement. Thompson owns a home and pays $ 1,000 each month — double what is required — to pay off her $ 80,000 mortgage (at 5% interest) before age 65. The rest of her household expenses average about $ 400 a month.

One of Thompson’s main concerns is debt. When her mother died in 1991, she began spending money on vacations to get away from home. When she adopted James four years later, she says, “He didn’t come with much, and I wanted to spoil him.” She charged more than $ 22,000 on gifts but has been able to eliminate most of that debt using money earned from summer jobs. She still has about $ 4,300 on three credit cards with interest rates ranging from 21% to 24%.

Thompson says her goal is to get rid of the remaining debt so that she can concentrate on saving for James’ college education. At present, he has about $ 500 from birthday and Christmas gifts in a savings account. His godfather also invested an unknown amount of money for him.

Like most single mothers, Thompson’s challenge is to use her modest income to pay her daily expenses, save for retirement, and invest for her son’s education. According to the Women’s Institute for a Secure Retirement (WISER), two out of three working women earn less than $ 30,000 a year. With such limited resources, financial advisor Cheryl Creuzot says it is imperative for single mothers to put certain basic elements in place:

ESTABLISH A STRONG FOUNDATION

“Single mothers need to lay a solid foundation before they think about long-term investments and asset allocation,” says Creuzot. “Their primary goals should be to create an adequate emergency fund, establish a budget, live within the confines of that budget, and eliminate debt.”

Financial planner Kathy Williams, Thompson’s advisor of three years, says Thompson should use the extra $ 500 that she’s putting toward her mortgage to pay off her high interest credit cards. Once that debt is paid off, the $ 500 should go toward establishing an emergency fund, says Williams.

Most financial planners advise having at least six months of living expenses put away, but Williams suggests that single mothers aim for at least three months, as they may not have the resources to do more. Having an emergency fund is critical for a single mother because she may not have anyone to rely on if she loses her job. The emergency fund should be kept in either a savings account or credit union — a place where money can earn interest but still be accessible. Creuzot recommends the no-fee ING Direct Orange Savings Account, which offers a variable 1.8% annual percentage yield.

Another part of the foundation is having adequate disability and life insurance as well as a will. “Risk management is extremely critical for a single mother,” says Creuzot. “If the woman becomes sick, disabled, or dies prematurely, she has a dependent, so she’s got to make sure that all the ‘what ifs’ are taken care of.”

Thompson has a $ 25,000 life insurance policy through the university, and she doesn’t have a will. Williams suggests Thompson increase her life insurance to at least $ 150,000, which will give her enough to pay off funeral expenses, the mortgage, and other debt, with a little money left over for James.

SAVE SENSIBLY

With the foundation in place, single mothers can begin saving for retirement and their children’s education. “Adoption is a growing trend,” says Creuzot, “but what’s more common is single motherhood achieved because of divorce, and most divorce decrees don’t speak to college costs.” Williams suggests concentrating on saving for retirement first, advising single mothers to put as much as possible into their 401(k) plans and Roth IRAs. “Women have to look at this as funding for the long term,” Williams says. “Single mothers will have three to five different jobs before they retire, but instead of rolling over their 401(k) accounts, they often withdraw the money and spend it.”

In terms of investing, Williams recommends a growth and income asset allocation, where the objective emphasizes modest capital growth with a focus on generating income. The risk tolerance for this allocation is moderate, with an investment time horizon of five years. This portfolio mix includes 25% large-cap growth, so that the focus is on large, mature companies that are still growing. This allows for an increase in assets over time with moderate risk.

While experts estimate that parents would have to save $ 200 a month from the time their child is born to send him or her to a state school for four years, that figure may be a bit unrealistic for single mothers. Creuzot suggests that single mothers determine how much they can afford to save and set the money aside in a 529 plan. These state-operated plans have investment features similar to mutual funds or variable annuities. And as long as the money is used for college-related expenses, you won’t pay taxes on interest gains.

PRESERVATION

Finally, single mothers must do estate planning. The federal estate tax, which must be paid after death on estates worth $ 1 million or more, is something many people don’t consider. “If you add up the value of your home, life insurance, and other assets, it isn’t hard to get to $ 1 million,” says Creuzot. “If you’re married, you get a marital deduction that defers the estate tax, which starts at 41%, until the second death; for a single person, the tax is due nine months after death.” Women need to ensure that their estate is not eaten away by taxes and administrative costs, and they should also identify a guardian for their child.

Addressing these issues might be challenging for single mothers, who may have limited resources to provide for themselves and their children. But Williams’ advice is simple: “It’s not the amount of money you earn, it’s what you do with it that matters.”

Retired: What, Me Worry? Congratulations on your retirement. Make sure you don’t outlive your savings.

Karen Williams feared she would never be able to retire. Had it not been for the 21,000 buyout she received from Michigan’s Wayne County Regional Educational Service Agency earlier this year, Karen, who is 60, would still be working. She has been saving for retirement for the last 14 years. Before that, she worked at a local YWCA but left after nine and a half years due to illness, not realizing that she needed to work for 10 years in order to be vested in her company’s retirement plan.

The 21,000 she received this year is the bulk of what Karen has to survive on. She receives a pension payment of 3,150 each month before taxes, but because it is tied to Social Security, the amount she receives will decrease once she reaches age 65. Since she lost a significant amount of money from her 403(b) plan and through an investment club during the recent market downturn, Karen is wary about investing. Afraid of losing her money, she has her windfall in a simple savings account. She hopes that there might be a way to invest so that the money will serve her better over the long term.

Until recently, Karen had 22,000 in debt after completing her Ph.D. from Wayne State University, as well as other expenses after she got divorced 25 years ago. Her son helped her set up a consulting business, and she used the money from this second job to pay down her debt. “I have concerns,” says Karen, “not so much about the next year or two, but beyond that, especially if I stay on this fixed income, which is substantially less than I was making.”

MAINTAIN CASH FLOW

“Most retired women’s primary concern is cash flow,” says Cheryl Creuzot, president and CEO of Wealth Development Strategies L.P., a financial management and planning firm. “They need to ensure that they don’t outlive their income.”

According to the Women’s Institute for a Secure Retirement, single, older women, including widows, receive more than half of their income from their Social Security benefits. In fact, Social Security is the only source of income for 40% of African American senior citizens. Most financial advisors say that retirees need about 70% of their pre-retirement earnings to comfortably maintain their standard of living. Social Security will replace about 40% for those with average earnings, which means that almost everyone will need supplemental forms of income such as a pension, savings, or other investments.

The first goal is to reduce expenses. Karen did so by setting up her
consulting business, which allowed her to eliminate debt. Creuzot says Karen should continue working in order to save more to supplement her retirement income, especially since her health is a concern and she does not know how much longer she will be able to work. Women should never retire simply because they reach retirement age. They should first calculate how much they should receive from Social Security, then be prepared to work until they have enough put away to retire in the style they wish. For more information on Social Security, log on to www.ssa.gov.

Financial advisor Kathleen Williams says women should put money into savings plans that offer a tax break such as a 401(k) or an IRA. Women over 50 can contribute “catch-up” amounts to each. For 2003, an additional 2,000 can be contributed to 401(k) plans, and an additional 500 may be contributed to IRAs.

In terms of asset allocation, Creuzot says, “Retired women need to structure a portfolio that allows them to replace their earned income and, at the same time, provides some growth because they could live another 20 to 30 years.” She recommends an asset allocation of income with moderate growth. The focus is on safer investments, such as low-risk bonds, but 40% of the portfolio is invested in stocks, which offers the best potential for fighting inflation over the long term. This is a conservative strategy that provides a lower overall rate of return in exchange for increased stability. It is most suitable for retired women, as they need to continue generating income yet also need capital appreciation to counter their loss of purchasing power.

Kathleen suggests that Karen invest 10% of her pension as well as 16,000 of her 21,000 into this new portfolio mix. The remaining 5,000 should be used to establish an emergency fund. “The goal is to grow that money as much as possible between now and age 65, at which time her income level will go down,” says Kathleen. “If she can eventually accumulate another 50,000 to 60,000, she will have 325 in additional income each month over many years.”

Another option available to increase retired women’s cash flow is a reverse mortgage — a loan against your home that you do not have to pay back until you die, sell your home, or move out. This allows for either a lump-sum or a monthly withdrawal. To be eligible for most reverse mortgages, you must own your home and be at least 62 years old. There is no minimum income required to qualify, and you do not have to make monthly repayments.

PRESERVE YOUR ASSETS

“Assuming that women get past the first concern and don’t consume all their money, the next question is how to preserve it,” says Creuzot. All retired people should consider a long-term care policy to ensure that their funds are not eroded by unforeseen medical expenses, such as living in a nursing home. Women should also have enough life insurance to pay off their
debts after death and to leave an ample sum for survivors. Older women who have had previous illnesses and find it more difficult to purchase life insurance should look into getting guarantee-issue insurance (which requires no health exam) for as much coverage as they can afford.

Estate planning is key for a retired woman. Needless to say, Karen should have a will. Kathleen suggests setting up a Transfer on Death (TOD) on mutual funds that will allow the money to be transferred to a beneficiary. Retired women should also look into a durable power of attorney and a medical power of attorney, which will allow someone to make decisions on their behalf. In addition, if a woman is widowed and has an estate worth at least 1 million, she should ensure that she has enough to pay the federal estate tax that would have been deferred until her death.

Experts urge women to seek the counsel of attorneys, as well as financial planners, who can help grow their estate’s value and protect it from taxes and inflation. Many women are less likely to seek advice, often because they do not think they have accumulated enough wealth to make it worthwhile. “Never think that your portfolio is too small to seek financial advice from a professional,” says Kathleen. “You have to be careful with these assets that you’ve spent a lifetime accumulating.”