When your paycheck IS your pension

by Don Kuehn

You’re old enough. You’ve worked long enough. But you couldn’t save enough.

Women--hundreds of thousands of women--most in their 50s and 60s, most caught in the surge of divorces that started a generation ago, are finding it impossible to leave the work force. The reason is simply that they lack the financial resources necessary to pull off a successful retirement plan.

The statistics are daunting. Four of every 10 marriages end in divorce. It’s almost always the ex-wife who takes the financial hit. Statistics show that when couples break up, the wife’s standard of living plunges by 30 percent in the first year; the husband’s goes up by 10 percent.

Alimony, you say? Get real. It’s a relic. With more women in the work force demonstrating a capacity to earn a living of some sort, less than 15 percent of divorces end with an alimony award (and 34 percent of those never see a dime of what’s owed them).

The years spent bearing and raising children are the crucial years women miss for building pension and personal assets. Meanwhile, male spouses continue working, earn higher salaries, get promotions and build larger pensions--a point not to be lost when divorce settlements are being negotiated.

In the debate over Social Security reform, women’s advocates argue that credit should be given for years spent at home raising children.

Among single, older women, those divorced and not remarried (14.4 percent) outnumbered widows (13.2 percent) for the first time in 1998. That year, there were nearly 12 million women in their late 50s and early 60s. The numbers completed a trend toward reversal that demographers have tracked back to 1965 when widows outnumbered their divorced sisters 21.6 percent to 3.8 percent.

Pension systems in this country favor continuous, full-time employment with a single employer. That’s a pattern few women follow. Today, with job mobility and corporate downsizing, not many men fit the model either.

Under provisions that kicked-in this year, there are higher contribution limits and special catch-up provisions for those over 50 investing in traditional and Roth IRAs and in company-sponsored retirement plans. This is a great opportunity for those approaching retirement who have the wherewithal to crash-save. Unfortunately, there are not many of us who are in a position to take full advantage of the new catch-up provisions.

IRA contributions have gone up to $3,000 and will climb to $4,000 in 2005 and $5,000 in 2008 and beyond. But if you’re 50 or older you can add an extra $500 this year, max-out at $4,500 in 2005, $5,000 in 2006 and $6,000 in 2008 and beyond. When the contribution reaches the $5,000 level, it will be adjusted for inflation.

For "salary reduction" plans like 401(k) and 403(b) arrangements, the maximum contribution this year is up to $11,000 and will increase by $1,000 a year to a top of $15,000 in 2006. There are also catch-up provisions here. People over 50 can contribute up to $12,000 this year and eventually $20,000 in 2006.

There is also a new tax credit to encourage lower-middle-income workers to contribute more to retirement plans. Check with your tax preparer to see if you qualify.

The habit of contributing to IRAs at the beginning of the year, coupled with the higher contribution amounts can really pay off. Under the old rules, putting in $2,000 a year would result in $111,529 after 20 years assuming a 9 percent compounded rate of return.

Under the new rules, without any catch-up contributions, an investor adding the maximum to an IRA at the beginning of each year would amass $263,824 after 20 years. With catch-up contributions, a 50-year-old today who continued earning income and contributed the maximum to the account would have $309,693 at age 70.

As a (now retired) union organizer, I’ve often used the old saying that few people plan to fail, but many fail to plan. The same can be said about marriages that end in divorce. As uncomfortable as it may be--no matter what your current state of bliss--there are some things women in particular should factor in when divorce seems inevitable.

• Make sure your name is listed on all household accounts and investments and keep at least one credit card in your own name to help establish creditworthiness.
  
• Review insurance coverage. If your health insurance is tied to your spouse's job you’ll likely lose coverage within 36 months of a divorce (some states vary). Demand the cost of replacement insurance in any divorce settlement.
  
• Don’t forget his pension. Women often pass up the growing value of a spouse’s defined-benefit plan or 401(k) or 403(b) plans in favor of immediate cash or the family home. This is an area where a professional adviser can really be of help.
  
• Don’t be so sure you want to keep the house. Unless it’s paid off, high mortgage payments, property taxes, maintenance and routine upkeep can swamp a single income. It’s probably best to sell the house and divide the proceeds.
  
• Inform all joint-account creditors in writing that you are separated and will be responsible for your debts only. Protect your interest in joint bank accounts as well, perhaps getting your attorney to freeze the assets so that two signatures are needed to make transactions.
  
• Get professional advice sooner rather than later. When dividing property, you need someone who can navigate the minefield of capital gains on real estate and investments, who knows the tax code and who can project the long-range effects of proposed settlements.

Older single women have always been at greater risk of falling into poverty than their married sisters. Even widows fare better than the divorced because at least they have the marital assets (pension and investments) built up during the marriage.

Today, too many women face retirement age unable to quit working. Their paycheck is their pension. Retirement for them is like an oasis shimmering in the desert sun--never really coming into focus.