Five Ways Women Under 40 Can Avoid Retirement Poverty
It’s crucial to understand how the deck is stacked against you
While the gender pay gap isn’t news to working women, less understood is a series of other financial and demographic realities that leave women vulnerable in retirement.
A new study from the National Bureau of Economic Research reveals:
By age 80, 13.5% of women live in poverty, compared to 8% of men.
Women looking for work in their 60s get about half as many callbacks as women age 29 to 31 for administrative assistant jobs.
Women live longer than men, which means they need more retirement savings, yet career breaks for child-rearing and other factors often leave them with far less.
Women are less likely than men to have a workplace retirement plan – 61% vs. 80%. And the employer match, automatic payroll deductions and ready-made investment options of a workplace plan are big incentives to save.
So, little surprise, women have to fend for themselves. Four strategies to embrace:
Act like you’re single … even when you’re married. The Employee Benefits Research Institute (EBRI) reported that 20% of retired women say their lifestyle is either somewhat worse or much worse than expected. More than one in three divorced women said their retirement lifestyle was not what they expected, as did 23% of widows. But interestingly, only one in 10 single women said their retirement lifestyle was in any way worse than they expected, and more than one in three reported it was better.
One explanation: Single women know their retirement relies on their own engagement in all types of planning decisions, and thus are well aware of what they need to do (and not do) to have a shot at a comfortable retirement. The dangers of leaving retirement planning to your husband, covered here:
The single mindset might prevent you from retiring at the same time as a husband. Working longer can boost Social Security benefits enough to offset early career earnings hiccups (gender pay gap and time off for raising kids).
Plan on being a widow. That’s just the math of women having longer life expectancies than men, and the tendency for women to marry men who are a few years older. It’s an argument for pushing yourself and your partner to save more for retirement today. What you sock away at 25 and 35 is going to have a huge say in your level of comfort at 85 or 95. Yes, 95. Among 65-year-old women today in average health, about one in three will still be alive at 95. That’s likely to rise by the time you reach your mid 60s:
Build your own retirement plan. If you’re among the 40% of women who don’t have a workplace retirement plan, get familiar with individual retirement accounts (IRAs). You can set up an IRA account at any discount brokerage, and most don’t require a big initial investment. You can set up your account to automatically zap money from your checking account every month. If you invest in exchange-traded funds, there’s no minimum amount to invest. In 2020 anyone younger than 50 can contribute up to $6,000 in an IRA. Consider a Roth IRA if you’re eligible. They are especially smart when you are younger and have yet to hit peak earnings: https://www.rate.com/research/news/save-weekly-have-million-plus
Save more than the standard IRA limit. The fact that women are less likely to have a workplace plan creates another disadvantage. This year, the maximum contribution to a 401(k) or 403(b) if you are younger than 50 is $19,000. As noted above, it’s $6,000 for an IRA.
As a general rule, retirement planning experts recommend saving at least 10% of your salary for retirement (15% is even smarter). If that works out to more than $6,000, you’ll need to consider other retirement saving options.
If you are self-employed you are eligible to save in a SEP-IRA, which can have much higher contribution limits than a regular IRA. All discount brokerages offer SEP-IRAs. You can also set up your own 401(k), called a solo 401(k) or individual 401(k). Just be aware there are some extra tax reporting steps with a solo 401(k): https://www.rate.com/research/news/retirement-options-self-employed
If you aren’t self-employed, open a separate regular (taxable) account at your discount brokerage and do more saving in that account. Invest in low-cost index mutual funds or ETFs to avoid taxes while the money is invested.
Don’t blindly fight for the house in a divorce. EBRI reports that for 17% of retired women who are divorced, housing expenses were much higher than they expected.
That’s a factoid worth remembering. In the event of divorce, the desire to stay put can be quite strong. But at a minimum, push yourself to sit down with a trusted financial pro to analyze the financial implications. (Also, keep in mind that there are financial advisors who specialize in divorce. You can find one through the website of the Institute for Divorce Financial Analysts.)