4 ways women can win with the SECURE Act
While women have historically done better than men in the stock market by about 0.4% per year, they are undeniably in a worse position when it comes to retirement security. This disadvantage stems from fewer years spent in the workforce, longer life expectancy, the wage gap and less access to workplace retirement plans.
The SECURE Act, which became law just before Christmas, was designed to help Americans save for retirement and includes provisions that address some of these issues. Needless to say, it does not tackle the wage gap, which, according to the World Economic Forum, at the current rate, will be closed in a mere 257 years.
I teach about 20 women’s financial planning workshops per year. I hope this is a class that will phase out over time as we close the wage gap and provide women more access to retirement plans. In the meantime, here’s what I will be talking about to women in 2020 regarding the SECURE Act:
1. Delaying RMDs
There is no gender factor when it comes to required minimum distributions. Men and women have historically been required to take the same percentage out of their retirement accounts, based on their age, starting at age 70½. This is a disadvantage to women, because their life expectancy is three years longer than men at age 65 and, therefore, they should be taking lower distributions.
While the SECURE Act does nothing to lower the distribution amount for women vs. men, it does push the distribution age back. This has obvious benefits if you live a longer life, but also benefits those with IRA savings who decide to work past age 70. The “still-working exception” allows you to postpone distributions from your current employers’ retirement plan, but not from your IRAs. Anyone born on July 1, 1949, or later will now be required to start taking distributions at age 72, not 70½.
2. Greater access to lifetime income annuities
In the purest sense of the word, an annuity is a lifetime income stream. Annuities are issued by insurance companies but have rarely been an investment option within workplace retirement plans … until now. The various insurance lobbies were fully behind the SECURE Act legislation because it reduces the fiduciary liability associated with annuities within workplace retirement plans. As a result, you will start to see more annuities offered on your 401(k) list. This is a highly controversial provision within the SECURE Act. That’s because annuities — although strongly supported by academic research — have been given a bad name by insurance agents who use them as the solution for every problem and by Ken Fisher, who has used their shortcomings as a marketing tool in every oversized mailer you have gotten in the last decade.
We don’t know yet how attractive these annuities will be. We do know that annuities generally have more utility for women than for men, once again, because of a longer life expectancy. Annuity rates are based on unisex mortality tables that fall between male and female life expectancies. An oversimplified way to think about an annuity is: If you live longer than the life expectancy tables predict, you win. If you die earlier, the insurance company wins. Statistically, women will outlive the unisex life expectancy.
3. Expanded access to retirement benefits because of changes to the 1,000-hour rule
Women have long been plagued by something called the 1,000-hour rule. Essentially, if you work less than 1,000 hours in one calendar year (19.2 hours per week), your employer is not required to offer you a workplace retirement plan. Women are often the primary caregiver not only for children but also for aging parents. If, and when, those women who left their office jobs return to the paid workforce, it may be in a part-time capacity, without benefits. The SECURE Act says that if you work 1,000 hours or more in one year OR if you worked at least 500 hours in each of three consecutive years, the employer can no longer exclude you.
4. Removal of the age limit on IRA contributions
For no obvious reason, the traditional IRA was the only retirement plan with an age restriction on contributions. The SECURE Act eliminates that age limitation and creates a way for those still working in their 70s to save in a tax-advantaged vehicle.
So why does this matter for women? One of the best things women can do to combat the disadvantages of fewer years in the workforce and less pay, is to work longer. Besides the obvious benefit of fewer years of depending on your savings for income, it allows your money to accumulate longer and will increase your Social Security benefits. Social Security looks at your highest 35 years of earnings. If you spend 20 years in the workforce, you will have 15 zeros in that formula. Every year you work, one zero is replaced by earnings. While that benefit increases, you can save a portion of your income into a traditional IRA in addition to your workplace plan or instead of it.
The primary intention of the SECURE Act was not to level the playing field for women in the retirement arena. In fact, it could be argued that the primary motivator is to raise taxes by eliminating the stretch IRA for inheritances by non-spouse beneficiaries and those who qualify for certain exemptions. That said, there are some definite wins for women in this legislation that should not be ignored.