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When it comes to saving for retirement, you’ve probably heard the conventional advice to maximize your 401(k) contributions if your employer offers a match and to open a Roth IRA so you don’t have to pay taxes on it. your investment gains in the future.
This is all good advice, with one caveat: women should save for retirement differently than men.
A 2016 study from the National Institute on Retirement Security (NIRS) found that the median household income for women aged 65 and older was $47,244 and for men it was $57,144. In other words, retired women had 83% of the median household income as age-matched men.
There are many factors that hinder a woman’s ability to save for retirement, including receiving fewer Social Security benefits and lower lifetime income and longer life than men.
When the cards are stacked against women when it comes to saving for retirement, what can women do to gain a financial edge? Select spoke with David John, a senior strategic policy advisor at the AARP Public Policy Institute, and Sallie Krawcheck, CEO of Ellevest, about why women tend to have less retirement savings than men, and what individuals and policymakers can do to help women save for retirement and reducing the gender gap in retirement savings.
What is the pension gap between men and women?
While the gender pay gap has narrowed in recent decades, one of the main reasons women have fewer retirement savings than men is because of their lower lifetime income.
“[Women] have saved less for retirement than men because of the gender pay gap and because they spend less time in the labor market,” says Krawcheck. “So they invest a lower percentage of their wealth than men.”
Women are more likely to take career breaks, leave the workforce completely, or work part-time to care for children or relatives, John says. According to the NIRS study, 60% of caregivers are women. Another study even found that the average lifetime income of mothers with one child 28 . is% less than the income of women without children.
Lower lifetime earnings translate into lower retirement savings for women, especially when it comes to collecting Social Security benefits — a monthly retirement benefit that individuals can begin collecting at age 62.
The Social Security formula is based on a person’s 35 highest earning years. Because women with children often have lower-earning years than men, they often receive fewer benefits than men, according to John.
Mothers with one child get 16% fewer social benefits than women without children. (Note: If a woman is the lowest earner in her marriage, she is eligible for Social Security benefit that is up to half of the top earner’s full benefit. Of her own earnings. When a woman receives the partner allowance, the maternity penalty has a negligible effect, according to a study.)
“Unfortunately, women are more likely to have lower Social Security benefits, even at age 70, than a man with a comparable” [job] history,” says Jan.
John also points out that many women who take a career break end up losing the money invested in their company’s 401(k) or leaving it in a fund that isn’t producing a high return.
“Another serious problem with the current pension system is that women are much more likely to be in part-time jobs or in jobs that don’t offer any kind of retirement benefit,” John says.
Finally, women often have insufficient pension funds because they tend to live longer than men, meaning they have to save more despite earning less than men. In 2020, the average life expectancy for women at age 65 is 21.1 years. For men aged 65 that is 18.6 years.
What can women do to ensure they have adequate retirement savings?
First, John recommends that women wait until they reach age 70 to receive the maximum Social Security benefit. All individuals are eligible for Social Security benefits at age 62, but you will only receive a fraction of the full benefit if you receive it before you reach full retirement age, which depends on when you were born. For each year after you reach full retirement age and before you turn 70, the benefit you receive increases each year.
“If you delay taking that benefit after you reach full retirement age, which is three or four years, your benefit will go up by 8% each year,” John says. “In other words, if you’re 67 years old and you wait until 68, you’re getting 108% of what you would have gotten a year earlier. If you delay until age 70, you’re talking about a nearly 24% increase .”
One study found that married women are on average two to three years younger than their husbands and tend to retire at the same time as their husbands, even though they have shorter careers and longer life expectancies. While it can be tempting for women to collect Social Security benefits when their partner starts collecting them, they should wait until they become eligible to collect the full benefit.
Women automatically receive alimony if their partner earns significantly more than they do. For example, if a woman’s benefit is $750 a month and her husband’s benefit is $2,000 a month, Social Security will automatically award the woman the $1,000 partner’s benefit because she would earn more from the spousal benefit than from her own benefit. .
Spouses are only eligible for spousal maintenance if their partner receives the benefit. A couple receiving the spousal benefit can earn more if they both wait until they reach full retirement age to receive benefits, as the monthly amount is reduced if either of them receive benefits before they reach full retirement age reaches.
If a woman’s partner receives their Social Security benefits before reaching full retirement age, the partner’s benefit will be less than half. If her partner waits until he has reached full retirement age, the spousal alimony is 50%. (This includes same-sex couples.) So couples receiving the spousal benefit will maximize their Social Security benefits by waiting until the higher earner is 70 and the lower earner is full retirement age before receiving their benefits.
John also recommends that women advance their retirement contributions in their early 20s and 30s before having children. Once they have children, John suggests that women continue to save for retirement to ensure they have enough to supplement what they will receive from Social Security, while taking into account the longer retirement period they will have in compared to their husband.
Women should consider using a Roth IRA for their retirement investments. With a Roth IRA, after-tax money is allocated to retirement so investments grow tax-free. There is an income limit on a Roth IRA: If you are a single filer, you must earn less than $140,000 annually, and if you are filing with a spouse, your combined income must be less than $208,000. Companies such as Charles Schwab, Vanguard, and Betterment offer Roth IRAs with no minimum deposits and low fees.
If you want a robo-advisor aimed specifically at women, Ellevest offers both traditional and Roth IRAs. Ellevest’s algorithm takes into account factors that affect women’s retirement savings, such as living longer than men and earning less than they do, Krawcheck said. To use Ellevest retirement accounts, you must pay a monthly fee with Ellevest Plus or Ellevest Executive.
What are the possible policy solutions for the gender pension gap?
Several policy solutions have been proposed to reduce the gender pension gap, including a proposed Social Security health care provider credit. A caregiving credit would assign a value to the time individuals outside the workforce spend caring for children and elderly or sick relatives. This value would then be used to calculate Social Security benefits so that people would be compensated for their caring responsibilities. Paid family leave and medical leave can also help ease the burden on those taking time off to care for their families.
Another suggestion is a universal retirement savings system, where all employees are automatically enrolled in an individual retirement account.
What it comes down to:
Saving for retirement can be difficult for women when the maternity penalty affects both their lifetime income and their retirement savings. Saving for retirement can be a daunting task for most people, especially if you are told to load up your contributions early in life and invest for a longer time horizon. However, for women it can be essential to start saving as much and as early as possible to avoid being left without a pension later in life.
Editor’s Note: Opinions, analyses, reviews or recommendations in this article are those of the Select editors only, and have not been reviewed, approved or otherwise endorsed by any third party.