We all dream of the day we can retire from work. Unfortunately, most retirement planning is done by men. Complicating matters further, it is critical for women to think about saving for retirement differently than men.
Things to Know About Saving for Retirement.
Here are four things women need to know about saving for retirement.
1. You Will Live Longer Than Men in Your Life
On average, women live longer than men. In the U.S., the preliminary data for 2020 from the CDC shows that for all races, women have a life expectancy of 80.5 years, while men have an average life expectancy of 75.1 years.
This means that you’ll likely need to save for an additional five years of retirement as compared to a man in the same position. For Black or Hispanic women (as categorized by the CDC), if your spouse is of the same race, your life expectancy is over seven years longer.
How much more you have to save will vary by your current age, expected rate of return, and the expected rate of inflation.
Removing those variables for a moment, if Man A died today, Woman A (who theoretically spends $45,000 a year during retirement) will live five more years. As a result, she will need to have saved $225,000 more than Man A. That’s a lot of money.
2. Consider What Happens if You Leave the Workforce
Women are more likely than men to take time out of the workforce. The reasons for this could be extended travel, raising kids, or caring for family members.
I think we all wish we could just up and leave the workforce at times. (If you’re thinking about taking a sabbatical, be sure to check out Sam’s series about her sabbatical.) But, if you leave the workforce, you’re giving up retirement savings.
Your contribution towards social security will be less and your ability to commit to retirement savings will be less. Here are some calculations about being out of the workforce:
If Sarah earns $100,000, maxes out her 401k and her company matches 100% up to 5% of her salary, every year she misses the opportunity to save $22,000. At the end of 5 years with a 5% ROI, her investments would have been at ~$125,000.
This $125,000 nest egg, in 30 years with a 5% ROI, will have provided her with $540,242. If the market is good and she averages 8%, her $125,000 will get her $1,257,832. This is otherwise lost!
The reality is that if you are considering leaving the workforce, you should have a backup plan for saving for retirement. Starting your own business is a great option. Spousal IRAs are another option for some women.
Either way, before you leave your job, have a plan to recoup the retirement loss.
3. If You Stay in the Workforce, You’ll Earn Less Than Men
Women still earn less, dollar for dollar, than men. How should you factor this into retirement savings? There are two ways earning less money plays out in saving for retirement.
Just Plain Earning Less
If you earn $50,000 while your male co-worker earns $61,500, you have less money available to you to save for retirement. It’s that simple.
If you both want to save $7,500 a year for retirement, it means that you have to work harder to save the same amount of money. Either you have to spend less, earn more or the side, or both.
Work Matching Programs
Most workplaces that match or contribute some amount of money towards your retirement typically do so on a percentage basis. For instance, I worked somewhere where the company automatically contributed 10% of my salary towards a 401k plan. Another place matched, dollar-for-dollar 5% of my salary.
What does this mean?
If, at a 10% contribution rate, I earned $50,000 per year, while Joe earned $60,000 per year (for the same job), I would get $5,000 per year towards retirement while Joe would get $6,000 a year. Sure, after one year this might not be a lot of money.
But at the end of 30 years (assume the salary didn’t change in 30 years and a 7% rate of return), I’d have $510,365.21 in retirement savings. How much would Joe have? $612,438.25.
That’s a difference of over $102,000!
4. You May Get Divorced
Saving the most depressing topic for last, women also need to be conscious of the dreaded “D” word, also known as “divorce.” No one likes to think about it or plan for it, but the reality is that it happens. A lot.
You should not take into account your significant other’s retirement savings in planning for your own retirement. If you can do that, you’re in the clear.
Divorce disproportionately impacts women. The most prudent thing you can do is plan for your own retirement as though you were going to be living it on your own without anyone else’s assistance.
Read more about how divorce affects your money here.
The Bottom Line
Saving for retirement should be one of the key things women think about as they consider their financial wellness. If you want to retire one day, it’s time to start saving.
For a counterpoint, here are the two times when you should stop saving for retirement.
What else should women think about in terms of saving for retirement? Have you planned for retirement taking these factors into account?
I think you have to factor in a possible divorce. No body plans on getting divorced, but if happens quite often. I think women definitely have to plan for their own retirement.