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Women live longer than men, which means three things for a woman's retirement portfolio: It needs to have some stocks; it needs to be flexible; and it needs to keep costs low.
The average 65-year-old woman can expect to live to nearly 87, compared with 84 for the average 65-year-old man, according to the American Academy of Actuaries. About 45% of 65-year-old women will live to 90; about 5% will reach 100.
The goal of investing in retirement is to make sure your money lasts longer than you do. Just to be on the safe side, you should assume that you'll live to age 95 -- a roughly 30-year retirement.
Managing a retirement portfolio to last 30 years isn't easy. For one thing, your withdrawals will reduce your gains and magnify your losses. If, for example, your portfolio suffers a 10% loss and then you withdraw an additional 5%, your account balance will have fallen 15%.
Another problem: You'll need to increase your withdrawals to keep pace with inflation. Even if prices rise only 3% a year, a $1,000 monthly payment will have the buying power of just $401 in 30 years.
Several academic studies have shown that if you want to keep up with inflation, your initial withdrawal should not exceed 4% of your account. If, for example, you want to withdraw $3,000 a month from your savings to start and then increase that amount to account for inflation each year, you'll need to start with $900,000.
The 4% rule is conservative, and for a good reason: If you withdraw your savings too aggressively, you risk running out of money. You can take out slightly more money if you skip inflation raises in the early years of your retirement -- or if you take no withdrawals from the stock portion of your portfolio when the stock market is down.
Your best strategy, naturally, is to start with gobs of money. Failing that, here are some tips for women's retirement savings:
*Make sure you have 30% to 50% in stocks. Over the long term -- 10 to 20 years -- stocks typically produce higher returns than bonds or bank CDs. Think of stocks as your investment for the last 15 years of your retirement.
*Keep at least one year's worth of living expenses, and preferably two, in bank CDs or other ultra-safe investments. Don't withdraw money from stocks in a bear market if you can avoid it. Should the stock market turn against you, dip into your cash portfolio instead of your stocks. Later, in the next bull market, you can replenish your cash supply.
*Keep expenses to a minimum. Let's say you have a choice between two funds, each of which earns an average 9% a year before expenses. Fund A charges 0.5%; Fund B charges 1%. After 30 years, a $10,000 investment in Fund A will grow to $115,500. Fund B will grow only to $100,600.
You can't control the returns you'll get from stocks or bonds -- or even from money market funds, for that matter. But you can control investment costs. And that will mean big savings over time.
"People work their entire lives to enjoy their retirement," says Gary Schatsky, a New York financial planner. "If there's one job you can still have in retirement, it's cutting costs."
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