As reported by the U.S. Department of Labor, women employed full-time make an average of 84 cents for each dollar earned by men. Although this discrepancy can fluctuate based on factors such as age, ethnicity, and more, the stark reality is that women generally need to exert more effort to accumulate retirement savings equivalent to their male counterparts. Aside from receiving lower wages, women usually work fewer years and tend to have longer lifespans compared to men.
While we strive to alter this situation for future generations, women can also take proactive measures now to guarantee they are well-prepared for retirement’s uncertainties.
Retirement planning for women: Why do women save less?
Although the gender pay gap plays a significant role in this issue, there are additional factors that hinder women from accumulating retirement savings more effectively.
In the United States and other developed nations, women tend to outlive men by an average of four to seven years. Consequently, many women need to ensure their retirement funds last several additional years compared to those of a male partner.
Furthermore, women are more likely to pursue part-time opportunities or jobs that lack access to employer-sponsored retirement plans such as 401(k)s. Among part-time U.S. workers, 60% are women. The U.S. Bureau of Labor Statistics reports that 22.5% of all employed women work part-time, while only 11.7% of employed men do.
Additionally, women often exit the workforce to provide care for family members, including children or elderly relatives. This can widen the existing wage gap.
Although the situation may seem discouraging, there are several strategies women can adopt to secure their financial future.
How can women catch up with retirement planning?
Contributing more to an employer’s retirement program is a powerful step toward future financial readiness. Yet, there are more approaches women can take to improve their retirement planning outcomes.
Start saving early
One effective strategy for women to ensure they have sufficient savings for later years is to begin saving as early as they can. Leverage the power of compound interest by contributing to a 401(k) or similar retirement account at the earliest opportunity.
If your employer provides a matching contribution, aim to contribute at least enough to obtain the full match, or get as close as possible. Failing to take advantage of this match is essentially leaving free money behind.
Negotiate for a higher salary
Though it can feel uncomfortable, negotiating a salary increase can greatly enhance your retirement savings. A higher salary not only allows you to contribute more to your retirement accounts but also positively impacts your Social Security benefits, which are partially based on your highest 35 years of earnings. This means you’re able to save more now while also ensuring you receive greater Social Security benefits in retirement.
Just be mindful to not let your increased income lead to a rise in your lifestyle expenses. You deserve to enjoy your earnings, but try to resist the urge to immediately upgrade your spending habits or lifestyle before boosting your retirement savings.
Invest your money
While investing involves some level of risk, which can be challenging when safeguarding your retirement funds, it might seem safer to leave your money in a high-yield savings account away from market fluctuations. However, by not investing, you may miss out on the potential returns that the stock market can offer.
It’s natural to feel uneasy watching your investments drop during market downturns, but it’s crucial to keep in mind that long-term investing is key, especially as a woman planning for retirement. The longer your money remains invested in the market, the more it can benefit you through growth.
Focus on building a diverse portfolio to help mitigate potential losses associated with concentrating too heavily on a single investment.
Talk to a professional
Even if you’ve utilized a retirement calculator and established your retirement accounts through your employer or a robo-advisor, consulting with a financial planner is a smart way to ensure you’re on the right track.
Be sure to seek out a financial planner who acts as a fiduciary, meaning they are legally and ethically obligated to prioritize your interests. Many financial planners operate on an hourly or fee-based model, so you’re not locked into a long-term commitment.
Find other ways to save for retirement
Explore alternative methods to bolster your retirement savings, such as establishing a Roth IRA with a portion of your post-tax income. Contributing to both pretax accounts like 401(k)s or traditional IRAs, as well as after-tax accounts like Roth IRAs, can help optimize your retirement savings while minimizing your tax burden during retirement.
IRAs: Other ways women can save and plan for retirement
While there are no retirement accounts exclusive to women, numerous options exist beyond the conventional 401(k). An individual retirement account (IRA) can serve as an excellent vehicle for women to save and prepare for retirement, or to complement their 401(k).
IRAs can be tax-deferred or tax-advantaged and may include a variety of investment options like stocks, bonds, index funds, and exchange-traded funds (ETFs), among others. Remember to select investments upon opening your IRA; otherwise, your funds will remain stagnant without generating returns.
Before opening multiple IRA accounts, be aware that the IRS imposes limits on the total contributions allowed to traditional and Roth IRA accounts combined. Each IRA type comes with its unique regulations and limits, so collaborating with a financial expert is advisable to determine which account suits your needs best.
For example, in 2023, the combined total contribution limit across both traditional and Roth IRA accounts is $6,500, or $7,500 for individuals aged 50 and above. If you wish to contribute to both a traditional and a Roth IRA in the same year, you will need to allocate your contribution limit between the two accounts.
Types of IRAs to consider
Traditional IRA: If you lack access to an employer-sponsored retirement plan, a traditional IRA enables you to benefit from the same pretax contributions available with a 401(k). Contributions may potentially be tax-deductible if you qualify. Earnings grow tax-deferred until you withdraw them during retirement.
There are no income restrictions for opening a traditional IRA, though you may be required to take mandatory minimum distributions starting at age 73.
Roth IRA: These accounts are funded using after-tax income. Earnings grow without taxes or penalties until you withdraw funds after age 59½, provided your account has been open for at least five years.
If your income exceeds $138,000 as a single tax filer ($218,000 for married couples filing jointly), your ability to contribute may begin to phase out.
Spousal IRA: This allows a spouse with no or minimal income (for instance, a stay-at-home parent) to have a tax-efficient retirement account to which the working spouse can contribute. Eligibility requires being married and filing taxes jointly.
You have the option of choosing either a traditional or a Roth IRA. Note that the spousal IRA is not a joint account, and there are income and contribution caps. It’s best to consult with a qualified tax consultant to establish one correctly.
SEP IRA: This account is suitable for freelancers and small business owners, providing access to tax-deferred retirement savings. Contributions are made with pretax dollars now, and you will owe taxes when you withdraw funds during retirement. In a SEP (Simplified Employee Pension) IRA, the employer typically contributes, not the employee.
The major advantage of a SEP IRA is its high contribution limits, making it one of the most generous IRA options. In 2023, employers can contribute up to 25% of an employee’s salary or $66,000, whichever is lower. If you are self-employed, contributions are typically capped at about 20% of your net income.
Bottom line of retirement planning for women
Women are often conditioned to prioritize others’ needs over their own, which can be detrimental when it comes to retirement planning. If you haven’t yet started contributing to a retirement account, consult a financial planner or accountant to identify the best strategy and begin contributions. For those already enrolled in a 401(k), consider increasing your contributions to help you achieve your retirement goals.
