Women tend to be more financially vulnerable in retirement than men. The combination of women earning less over their lifetimes, saving less for retirement, living longer than men, and having a higher probability of needing nursing home care leads to greater financial insecurity and poverty for women in their older years.
Over the course of her work life, a woman with a college degree earns on average $1.32 Million, vs $2.19 Million for a college-educated man. Women cycle in and out of the workforce over their lifetimes as they respond to life events like childbirth and caring for aging parents. These workforce absences plus generally lower pay leads to lower retirement plan balances, as well as smaller social security checks.
There are also persistent myths that can undermine a woman’s retirement planning.
MYTH: Take Social Security Benefits as soon as you can:
REALITY: Taking early social security benefits can undermine your finances for decades. Benefits at age 62 are 25% less than benefits at age 66, and that reduction is permanent over your lifetime. If a spouse is claiming social security benefits on your record, early claiming reduces their benefit by a permanent 30%.
If it’s at all feasible, try to delay taking social security until age 70. Each year you can delay past your full retirement age adds 8% to your benefit. You will permanently increase your benefit by 36% by waiting to age 70.
MYTH: Savings/Spending Myths: Saving $1,000,000 for retirement is the gold standard for secure aging. You think you know how much you spend to support your current lifestyle, and you have heard that in retirement, you’ll spend even less.
REALITY: To safely generate $100,000 a year in retirement income, you’ll need to have saved $2.5 Million (4% withdrawal rate). Most people have no idea how much they really need to support their lifestyles and need to do a detailed budget to get a handle on spending.
Recent studies point out that in early retirement years, spending can actually increase due to travel and recreation activities. After those years, spending does drop for a while before it ramps up substantially as health care needs rise in later years.
MYTH: Medicare will cover my health care costs.
REALITY: According to the Employee Benefit Research Institute, Medicare premiums and copays alone will run about $146,000 for a woman and $130,000 for a man in retirement. That doesn’t include dental bills, long-term care premiums, over-the-counter medications, eyeglasses or nursing home care. Studies show that for a typical couple, health issues and costs fall harder on the woman, who often is able to take care of her husband but relies more heavily on outside paid care for her own health care needs.
What steps do women need to take?
- Prepare a detailed budget so you’re not guesstimating your cash needs.
- If you’ve been out of the labor force, try to increase your retirement contributions when you return to catch up.
- School yourself on the wide array of retirement plans that may be available to you, and try to contribute the most that you can. Always try to maximize an employer contribution to a 401(k).
- If you’re self-employed, look at SEP IRAs and Individual 401(k) and Profit Sharing plans to save for retirement. SEP IRAs allow putting aside 25% of your pay (up to $58,000 a year) in your retirement account. Individual 401(k)/PSP may have more flexible options to explore.
- Get invested/stay invested! A retirement plan is a long-term savings plan. Don’t try to time the market for short-term moves.
- Prioritize your retirement savings as an essential part of your financial planning.