Updated for 2020. Single and unmarried individuals may be accustomed to being completely self-reliant, but when it comes to saving for retirement, it may take some extra planning to stay on track. Unfortunately, most single people won’t simply have half the expenses that a couple might. Larger expenses like housing and cars often eat up much more of a single individual’s monthly earnings compared to couples. However, with proper planning and an ongoing commitment to saving and investing, single and unmarried women can work to attain an enjoyable lifestyle and comfortable retirement.
How much cash to keep on hand
As a general rule of thumb, single individuals or one-income households should have at least six months of non-discretionary expenses (such as a mortgage and groceries) set aside in savings. However, it is also important that individuals don’t keep too much cash on hand. Having several years of expenses in a checking or savings account earning little or no interest is a barrier to building wealth.
There are exceptions to the guidance on how much cash to keep which should be noted. Generally, if you are planning a purchase within the next few years, those funds should be kept in cash. This will help ensure your purchase isn’t derailed by a market downturn as there may not be enough time to recover.
When deciding on how much cash to have on hand, also consider the stability of your job. If you’re in an industry with a lot of M&A activity or are working for a startup, it may make sense to keep more cash on hand if there is a higher likelihood you’ll be in-between jobs.
Keeping expenses in check
Budgeting can be challenging for single people, especially for single women. The Institute for Women’s Policy Research reports that women only earn 80 cents for every dollar earned by a man. One expense that can be very difficult to tackle as a single or unmarried individual is housing. According to The Bureau of Labor Statistics, couples spend almost 24% of income on housing; however single men spend about 30% and single women almost 40%.
To build wealth, single people should try to keep their housing costs down where possible and within reason. For example, even if your income can support an apartment in a new luxury building or a high monthly mortgage payment, how much will then be left each month to save for retirement? For many high-earning individuals, simply maxing out your 401(k) each year will not be enough to maintain the same lifestyle in retirement.
Also Read: Do Single People Need Life Insurance?
If you need to cut back on lifestyle spending, consider looking at all of your expenses and reducing or eliminating large expenses that don’t add as much value to you. To start, consider looking at the following expense categories: housing, transportation, food, travel/entertainment, and healthcare. Where are you spending the bulk of your income? How much value does this type of spending add to your life?
We are all different. Some people treasure daily lunch out with co-workers, while others end up routinely eating out. If you are spending a lot on a car payment and insurance, consider going with a less expensive model next time, particularly if you don’t spend a lot of time driving.
Healthcare costs can’t always be prevented but there are some ways to save. If you are enrolled in a high-deductible health plan, consider whether it may be advantageous to switch to a traditional plan. If you aren’t using a health flexible spending account (FSA) or health savings account (HSA) for those enrolled in a high-deductible health plan, consider investigating whether your employer offers these benefits, which allow you to pay for qualified medical expenses using pre-tax dollars.
Retirement planning and investing for single women
For single investors, it typically makes sense to start by putting as much as possible into your 401(k) or workplace retirement plan, up to the maximum. Saving early and often isn’t necessarily “sexy,” but the power of compounding over time can be tremendous. How much money you need saved up to retire will vary considerably from person to person. Individuals with high incomes also tend to have higher annual lifestyle expenses. In this situation, maxing out your annual 401(k) contributions may not be enough to provide the same lifestyle in retirement.
Other common factors that play a large part in determining how much is “enough” to retire are: family history of longevity (women often live longer than men), costs of living in desired retirement location, retirement age, and desired annual income in retirement.
If annual additions to a retirement plan at work aren’t enough to accomplish your retirement planning goals, consider the benefits of an individual brokerage account. A brokerage account is the most flexible type of investment account. While there are no tax advantages, investors also have complete freedom to make contributions and take withdrawals without restrictions or penalties. A brokerage account is often used to fund retirement before required minimum distributions (RMDs) begin and allow retirees a way to delay taking Social Security until age 70.
The Secure Act, which was passed at the end of 2019, changed the age some retirees will need to begin mandatory distributions from tax-deferred retirement accounts. Required minimum distributions must begin at age 70 1/2 (if you’re born on or before June 30th, 1949) or 72 (if born on or after July 1st 1949).
Darrow Wealth Management is a predominantly female-run and second-generation family business in Boston, MA and Concord, MA. To discuss your retirement planning and investment strategy, contact us today to schedule a free phone consultation.