By Carmen Wu, CRPC®
Egan, Berger & Weiner, LLC
Saving for retirement is challenging—but studies show it’s actually tougher for women, who all too often find themselves living in poverty during retirement.
On average, women who are 65 years and older rely on a median income of around $16,000 a year, and rely almost exclusively on Social Security benefits, according to the recent congressional analysis of 2012 Census data. That’s $11,000 less than men the same age, whose annual income is about $27,612.
Why are women challenged in this way?
1. For starters, women tend to live longer than men.
- Today, the average American can expect to spend about 30 years or more in retirement.
- For a 65-year-old couple, there is a 50 percent chance one will live to the age of 92 and a 25 percent chance one will live to the age of 97. The average female can expect to outlive the man in her life by almost five years.
- In 2011, more than 60 percent of individuals aged 80 and older were women.
Since women can expect to outlive the men in their lives, the prospect of having a lengthier retirement and outliving their assets is great. Another important fact to keep in mind is that with a divorce rate of more than 50 percent, many women at some point may assume sole responsibility for their finances.
Because of their longevity, women are also more likely to be single and depend on one income in their older ages. In 2012, only 45 percent of women aged 65 and older were married compared to 75 percent of men. Knowing that the longevity factor does not tip in our favor, we would be wise to be proactive in our retirement planning.
2. Women also have a lower retirement income.
Although women have made progress in the area of earnings power, they still have a ways to go before reducing the retirement gap.
“Women have seen a lot of improvements,” says Kelly Livers, regional branch executive and national chairperson for the Women’s Interactive Network at Charles Schwab. “Their earning power is increasing; they’re receiving more bachelor’s, master’s, and doctorate degrees than men. And, their overall employment rate is at an all-time high. In 2010, women became accountable for 50 percent of private wealth in the United States.”
That’s clearly good news for the future. But Livers adds: “Despite all of this improvement, the average woman still earns a lower salary than her male counterparts. This significant difference in earning has a major impact on how much women are able to save, leaving them with a smaller nest egg for retirement than men.”
According to Cindy Hounsell, JD, executive director of the Women’s Institute for a Secure Retirement (WISER), part of the problem is that in addition to women’s lower earnings, 67 percent of women spend a portion of their adult lives as unpaid caregivers.
“On average, women spend 12 years less than men do over their lifetimes out of the workforce caregiving for a family member,” Hounsell explains. “Fewer years translates to fewer years saving or participating in an employment-based retirement program.”
3. Social Security benefits are determined by your average indexed monthly earnings (AIME) during your 35 highest-earning years after age 21.
Let’s consider how Social Security benefits are calculated. Regardless of your gender, if you worked fewer than 35 years, your income for the missing years is counted as 0, which can bring your average down significantly.
This formula can place women at a disadvantage if they choose to take time out of the workforce to raise their children. In 2012, the average annual retirement benefit for women was more than 20 percent lower than for men ($13,233 vs. $17,005).
According to the Government Accountability Office (GOA) 2012 report, Retirement Security: Older Women Remain at Risk, women are more dependent on Social Security than men—and widows rely on Social Security for 58 percent of their retirement income.
To mitigate some of these retirement obstacles, it is important for women to better understand the impact that savings and Social Security benefits have on their retirement income.
4. Retirement saving participation is not a focus for women.
Traditionally, attaining the three-legged retirement stool—Social Security, a traditional defined benefit plan and supplemental defined contribution plans—offers the greatest opportunity for an individual to achieve retirement security.
- Defined benefit pension plans (DB plans) were designed to provide income for life, much like an annuity.
- Employers provide benefits based generally on the number of years the employee worked at the company and an average of the final years of pay.
- While this is an important source of retirement income for individuals, the reality is that fewer employers offer traditional DB plans today.
- In place of the DB plans, more employers now offer defined contribution plans (DC plans) such as 401(k)s.
- Most DC plans do not offer an annuity or lifetime payout option.
Fewer women are gaining access to DB plans and more are gaining access to DC plans. And, women who have DB plans generally have less pension income than their male counterparts due to their lower income. They receive an average of just $10,995 from their own or their spouse’s DB plan, while men receive an average of $18,184. Women with DB plans tend to fare better than those without and are more likely to live above the poverty line in retirement when they have income from DB plans.
One positive aspect of the DC plans is their flexibility and portability.
- DC plans benefit women who may take time out of the workforce to care for family members.
- They may take assets that have accumulated in their DC plan, without penalty, and may continue to build retirement savings throughout a more varied career.
- Women’s long life expectancy creates a challenge that requires women to save much more money in a DC plan than their male counterparts so that they don’t outlive their retirement savings.
Because of women’s lower income, discretionary income many not be available during women’s working years for the extra saving required for retirement savings. Compounding the lack of discretionary income, women are in general more risk-averse and less financially literate than men, and are thus less able to accrue enough assets for their retirement years.
5. Women are more likely to live in a nursing home at the end of their lives.
More than 70 percent of nursing home residents are women whose average age at admission has been 80 years of age. The cost of a private room in a nursing home averaged $75,000 per year, with a shared room being almost $67,000 per year, though those figures vary from state to state. Still, healthcare costs are among the biggest expenses for retirees.
The Bottom Line
Planning ahead is the key for women, insists Kathleen Murphy, president of Personal Investing at Fidelity. While a lot of progress has been made in terms of closing the gender gap for women, “It is critical for women to empower themselves by becoming equal partners in managing the family finances and in long-term financial planning conversations.”
- Fidelity Research, Sept. 24, 2013. Fidelity® Research Shows More Women Assuming Role as Family CFO, But Gap Remains for Many Couples in Sharing Responsibility for Management of Family Finances.
- The World Bank, based on the most recent data using births in 2011. U.S. Census Bureau, 2011 Table 1. The Older Population in the United Sates.
- National Marriage and Divorce Rate Trends, Centers for Disease Control and Prevention Bureau of Census, “The Statistical Abstract of the United States,” Table 57. Marital Status of the Population by Sex and Age, 2010.
- Fox Business, Casey Dowd, May 22, 2014. How Women can Create a More-Secure Retirement.
- National Alliance for Caregiving in Collaboration with AARP, November 2009. Caregiving in the U.S.: A Focused Look at Those Caring for the 50+.
- Americans for Secure Retirement, 2008, Cindy Hounsell. The Female Factor 2008: Why Women are at Greater Financial Risk in Retirement and How Annuities Can Help.
- Social Security Administration. Number in current payment status and average monthly amount by sex of beneficiary.
- 2008 Cohort Changes in the Retirement Resources of Older Women, Social Security Bulletin 68(4), Social Security Administration, Iams, H.M., Phillips, J.W.R., Robinson, K., Deang, L., and Dushi, I.
- The Cost of a Failed Retirement System, National Institute on Retirement Security, Porell, F. Forthcoming.
- From Work to Retirement: Tracking Changes in Women’s Poverty Status, AARP Public Policy Institute, Lee, S., and Shaw, L. 2008.
- Women & Long-Term Care, April 2007, AARP Public Policy Institute Analysis of Data from 2004 National Nursing Home Survey.
- Fidelity Research, September 2013, Women Remain Less Confident Than Men About Investing and Retirement Decisions Surprisingly, Younger Generations Most Passive.
8 Questions to Help Women Take Charge of Their Financial Future
Reprinted with permission from the U.S. Department of Labor
Employee Benefits Security Administration
According to the U.S. Department of Labor, planning and saving for retirement may seem like goals that are far in the future. Yet saving, especially for retirement, should start early and continue throughout your lifetime. Here are four reasons why saving matters to women.
Following are eight questions the DOL suggests women consider to help them think about retirement—and take charge of their financial future.
1. Do you work for an employer that offers a retirement plan? If your employer offers a retirement plan, join it as soon as you can and contribute as much as the plan allows. Most employers with a 401(k) plan match a fixed percentage of the employee’s contribution. The most common match is 50 percent of the employee’s contribution up to a maximum percentage of wages or salary (usually 6 percent). The majority of employers who provide matches offer 50 percent or more. That’s like getting free money!
While all job categories may not be included in your employer’s plan (those of part-time or temporary workers, for instance), your job may be one that is. Remember, by saving early, you have time on your side. Your savings will grow and your earnings will compound over time.
2. Have you worked at the job long enough to earn retirement benefits? In many companies, you may have to work for five years to become eligible to receive retirement benefits. Some workplaces have a shorter vesting period (vesting simply means that you have worked long enough to earn the right to benefits from a savings or pension plan). Too often employees, especially women, quit work, transfer to another job, or interrupt their work lives just short of the time required to become vested. Ask the personnel office, retirement plan administrator, or union representative about the vesting period and other details of your company’s plan.
3. Do you keep copies of the documents that define the provisions of your retirement plan? In addition to asking questions of company or retirement plan officials, you should keep copies of the summary plan description (SPD) and any amendments. The SPD is a document that retirement plan administrators are required to prepare, and it outlines your benefits and how they are calculated. The SPD also spells out the financial consequences—usually a reduction in benefits—if you decide to retire early (earlier than age 65 in many plans). You probably received a copy of the SPD when you joined the pension or savings plan, but you may request another one from your employer or plan administrator. Also remember to keep retirement-related records from all jobs. They provide valuable information about your benefit rights, even when you no longer work for a company.
4. What happens to your retirement benefits if you change jobs? You may lose the retirement benefits you have earned if you leave your job before you are vested. However, once vested, you have the right to receive benefits even when you leave your job. In such cases, the company may allow, or in certain cases may insist, that you take your retirement benefits in a lump sum when you leave. However, other companies may not permit you to receive your money until retirement. The rules for your plan are spelled out in the SPD.
A word of caution: If you receive your retirement benefits in a lump sum, you will owe additional income taxes, and may owe a penalty tax. A better way is to reinvest your savings in another qualified retirement plan or an Individual Retirement Account (IRA) within 60 days. You avoid tax penalties and you keep your long-term retirement goals on track. If you do want to reinvest the money, it is important that you do not directly receive it. If you receive the money directly, you will have to pay a 20 percent withholding tax on the amount you receive and then file for a refund in the next year, providing proof that you have transferred the funds to an IRA.
Instead, instruct the retirement plan to transfer your money directly to an IRA you have established or to another qualified retirement plan. This is easy to do using simple forms supplied by the new plan. If you want help with the forms, representatives of the plan are generally available to assist you.
5. Do you know how you can save for retirement even if you don’t belong to an employer-sponsored retirement plan? Anyone receiving compensation or married to someone receiving compensation can contribute to an IRA. In addition, if you are self-employed, you can start a Simplified Employee Pension Plan (SEP) or a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE).
As with other retirement savings plans, there may be tax consequences, and possibly penalties, if you withdraw your savings early.
6. Are you tracking your Social Security earnings? More women than ever work, pay Social Security taxes, and earn credit toward a monthly income at retirement. These earnings can mean some income for you and your family in the form of monthly benefits if you become disabled and can no longer work. If you die, your survivors may be eligible for benefits. In addition, you may be eligible for Social Security benefits through your husband’s work and can receive benefits when he retires or if he becomes disabled or dies.
Special rules apply if you and your husband have been employed and both have paid into Social Security. Special rules also apply if you are divorced or if you have a government retirement plan.
To calculate your benefit estimate, visit the Social Security Administration’s website.
7. Are you entitled to a portion of your spouse’s retirement benefit if you and your husband divorce? As part of a divorce or legal separation, you may be able to obtain rights to a portion of your spouse’s retirement benefit (or he may be able to obtain a portion of yours). In most private-sector plans, this is done using a qualified domestic relations order (QDRO) issued by the court. You or your attorney should consult your spouse’s plan administrator to determine what requirements the QDRO must meet.
8. Are you aware of the rules that govern your retirement plan and the retirement plan of your spouse if either of you dies? The rules are different for defined contribution and defined benefit plans. If you or your spouse belong to a defined benefit plan (a traditional pension plan), the surviving spouse may be entitled to receive a survivor benefit when the enrolled employee dies. This survivor benefit is automatic unless both spouses agree, in writing, to forfeit the benefit. You will need to check the SPD or consult with the plan administrator regarding survivor annuities or other death benefits.
If you are a beneficiary under your spouse’s defined benefit pension plan, you may want to request a copy of the SPD and other plan documents that describe your spouse’s vested benefits. You will probably want to make the request in writing, and you may be charged a fee for the information. The rules may be different if you or your spouse participate in a defined contribution plan (such as a 401(k) plan). Consult the plan administrator for details about spousal rights.
Once you’ve answered these questions, you’re on the road to learning more about financial freedom. As a resource for women (and men), the Employee Benefits Security Administration has issued Savings Fitness: A Guide to Your Money and Your Financial Future and Taking the Mystery Out of Retirement Planning.
For more information, visit the Employee Benefits Security Administration