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Ready, set, catch up on retirement savings

In the race to retirement, there's no doubt about it: Women are falling behind. Because they typically earn less than men, they don't save as much money. They're less likely to receive a traditional pension. Add the fact that they live longer, and you can understand why a new study by the Harvard Generations Policy Program concludes that boomer women risk a "never-ending struggle" to get by in their elder years.

But there's no reason to panic, either. There are steps women can take to prepare for a secure retirement. Here are some examples:

Consider working longer — but have a backup plan.

Working longer will give you more time to save for retirement, which is important if you got a late start. And it could make a big difference in the amount of Social Security benefits you receive.

Social Security benefits are based on the 35 years of your highest earnings. If you left the workforce for several years to care for your children, the years in which you had no or low earnings will still be included to bring the total to 35 years. Working an additional year or two, then, will allow you to replace those with higher-earning years, resulting in larger benefits.

Women tend to retire once their husbands do, even though the average woman is three years younger than her husband, says Alicia Munnell, director of the Center for Retirement Research at Boston College. Joint retirement "is dangerous, given that the woman tends to be younger" and has a longer life expectancy, Munnell says.

Keep in mind, though, that working longer isn't always an option. Forty percent of current retirees stopped working earlier than they'd planned, according to a recent survey by consulting firm McKinsey & Co. The primary reasons were job loss or health problems. So even if you plan to work until age 65 or later, save as much as you can. You may need that money sooner than you think.

Delay Social Security benefits.

Most boomers aren't eligible for full Social Security benefits until they're 66; those born in 1960 or later aren't eligible until 67. Yet 59% of women opt to claim reduced benefits at 62, according to the Center for Retirement Research.

The problem with claiming partial benefits is that you'll receive the reduced amount for the rest of your life. Working longer and delaying benefits could improve your financial security, says Cindy Hounsell, president of the Women's Institute for a Secure Retirement, a non-profit group.

Not sure when you're eligible for full benefits? Go to the Social Security Administration's website, www.ssa.gov. The site also features calculators you can use to estimate the benefits you'll receive, based on your age when you retire.

If you divorce, don't give up your retirement security.

When couples divorce, the wife often gives up all rights to her husband's retirement savings so she can keep the family home. In most cases, it's a bad trade, divorce experts say.

Most women, even those who have worked, haven't saved as much for retirement as their husbands, says Carol Ann Wilson, a certified financial divorce practitioner in Longmont, Colo. Women are also less likely to have a company pension plan.

Worse, divorced women often find they can't afford to keep the house. Even if the mortgage is paid off, the house may need a new roof or have plumbing problems. Those costs can soak up a divorced woman's income and savings, says Joyce Pearson, a financial planner in Scottsdale, Ariz. "Once you've got all your dollars tied up in the house, you can't take out a brick and buy a loaf of bread," Pearson says.

A better plan might be to sell the house and split the proceeds in exchange for a portion of your husband's pension, 401(k) or other retirement savings plan. Be sure this is part of your divorce agreement. You can't go back and ask for a share of your ex-husband's pension years later, after you realize you don't have enough money to retire. Retirement plans are considered marital property; you can't renegotiate division of property after a divorce is final unless you can prove fraud, Wilson says. "You cannot undo property division," she says.

Negotiating the division of a retirement plan is complicated. Make sure you have a divorce lawyer with experience in that area. If your lawyer doesn't know what a Qualified Domestic Relations Order is, it's time for a new lawyer. A QDRO is a court order that divides pension or other retirement benefits between divorced spouses.

Don't be afraid to take risks with investments.

Even if you're in your 50s, you may need to make your retirement savings last another 40 years. The best way to do that is to invest in a diversified portfolio that will provide long-term growth.

To enjoy good long-term returns, you have to take some risk. But don't load up your 401(k) plan with your own company's stock. Women tend to have more company stock in their retirement plans than men do, says Christopher Jones of Financial Engines, which advises workers on their 401(k) investments. That's dangerous. If your company runs into financial trouble (remember Enron?), you could lose your job and a big chunk of your retirement savings.

Penny Marlin, a financial planner in Delray Beach, Fla., says her younger clients understand the importance of a diversified portfolio. But some of her older, female clients "only want to invest in CDs," she says. "They're totally risk averse."

The trouble with that approach is that returns from certificates of deposit and other supersafe investments probably won't keep up with inflation. And unless you have a large pot of money, it's unlikely you can live off the interest and dividends from your investments.

Tapping your principal "is not a sin," Marlin says. "You have to look at total return." Total return includes interest, dividends and gains from the sale of investments.

If you're new to investing, start educating yourself. The Women's Institute for a Secure Retirement offers lots of information on selecting a mutual fund, choosing a financial adviser and investing in a 401(k) or an individual retirement account. Find them at www.wiser.heinz.org.

Consider annuitizing some of your savings.

Even if you've managed to put aside plenty of money, figuring out how to make your savings last through retirement is a tough task.

One way to reduce the risk of running out of money is to buy an immediate annuity. You give an insurance company a specific amount of money and receive guaranteed monthly payments for as long as you live, or for a specific period. In effect, you're using your savings to create your own pension.

Companies that sell immediate annuities say the lifetime guarantee makes them ideal for women, because women typically live longer than men. The downside is that insurers reduce payments to women to account for their longer lifespan, says Drew Denning of Principal Financial. A 65-year-old woman who invests $200,000 in an immediate annuity would receive about $1,300 a month for life, while a 65-year-old man would get about $1,400, according to ImmediateAnnuities.com.

Once you buy an immediate annuity, you give up control of your money.

If you have a health emergency or some other crisis, you can't take a big withdrawal to pay the bills. That's why most financial planners advise against investing all your savings in an annuity.

Another problem with immediate annuities: Inflation will erode the value of your monthly payment. For example, suppose you're 60 and you buy an annuity that pays $1,200 for the rest of your life. If you live to 90, the value of that payment will be much lower, says Pearson, the planner in Scottsdale.

Some immediate annuities include a cost-of-living adjustment, but at a price: Your initial monthly payment might be up to 30% lower than one for an annuity without the inflation adjustment, Denning says. A better idea: Buy your annuity in stages. Your money that's outside your annuity will have more time to grow and stay ahead of inflation.

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