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4 steps women can take to stave off a retirement shortfall

Christine Benz  |  07 Mar 2022Text size  Decrease  Increase  |  
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This article was originally written for a US audience.

The debate over the magnitude of the state of retirement is ongoing, but one aspect is settled: Women are in worse shape than men on nearly every important metric. The reasons are manifold, but a few factors loom large.  

Women have lower lifetime earnings than their male counterparts, which translates to fewer opportunities to fund retirement accounts. This can be attributed to both wage inequality and the fact that women are more likely to stop working to devote time to caregiving for family members—and these caregiving needs have substantially intensified during the coronavirus pandemic. 

In addition, women have longer life expectancies than men. This means they must stretch those smaller average balances over a longer time frame. 

That convergence of lower retirement balances and a longer retirement period helps explain why women are much more likely than men to be poor in retirement. 

There’s no easy fix for this issue. But women can consider these five questions to improve their retirement readiness. 

Question 1: How might my earnings affect my retirement?

In the US, women’s earnings tend to peak earlier in life than men’s—and those peak average earnings are substantially lower—according to 2019 data, the most recent data available. In addition to broader wage inequality, this happens because women are more likely to reduce their paid work schedules or quit work altogether to devote time to unpaid caregiving for children or elderly parents. Deciding whether to take on caregiving responsibilities is often about more than money, and the timing isn’t easy to predict or control. 

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Still, the likelihood that women’s earnings will peak earlier makes it even more important that they take advantage of retirement contributions at two key junctures:

  • The early years of employment, when there’s the most benefit to be gained from compounding.
  • The early-to-peak earnings years, when women can contribute the most money.

Women who have reduced or stopped working because of caregiving obligations can play catch-up further down the line. If they re-enter the workforce later in life and have the extra income, they could contribute more to their retirement accounts during the empty nest years. 

Question 2: What is an appropriate amount of risk?

Though some research has shown a marked difference in how women approach investing compared with men, a more nuanced look indicates that this difference largely can be attributed to the gender income gap. 

As a group, women make less money than men. So with less margin for error in their overall finances, they may also be less inclined to risk their savings by investing in stocks. Still, controlling for demographics (comparing men and women with similar ages, incomes, and plan balances, rather than comparing all men to all women) reveals more closely aligned investing behaviours.

To ensure they’re assuming a situation-appropriate amount of risk, women can take advantage of professional advice solutions such as lifecycle funds. These accounts help ensure that women's asset allocations are appropriate given their proximity to retirement, and this has helped bring women's asset allocations more in line with men's. 

Question 3: How long should I plan to work?

Our retirement dates are often less in our control than we might like to believe: Lifestyle and health considerations, caregiving demands, and an ability to stay employed all factor into when we retire.  

Nevertheless, the financial benefits of working longer are undeniable: for example, additional retirement-plan contributions, delayed portfolio withdrawals, and a shorter drawdown period.

These benefits are especially pronounced for women, as the interrupted work trajectories and longer life expectancies compound the stresses placed on retirement assets.

For women hurtling toward retirement shortfalls, delaying retirement will be the single most financially impactful decision they can make. In research I conducted with John Rekenthaler and Jeffrey Ptak, we found that a 3.3% withdrawal rate is a safe one (assuming fixed real withdrawals over 30 years of retirement, from a 50% equity/50% bond portfolio). Delaying retirement by only one year can lift this rate to 3.5%; delaying retirement by five years can lift it to more than 4%. 

The financial benefits of delaying retirement argue for maintaining work skills through investments in continuing education, being mindful of the incidence of ageism and staying alert to combat it, and making investments in physical health. 

It’s also worth noting that “working longer” doesn’t necessarily mean sticking it out in a job that makes you miserable. If you can tick a couple of the working longer benefits outlined above—for example, delaying portfolio withdrawals even if you aren’t earning enough to make additional retirement contributions—that can still have a big impact for your plan. 

Question 4: How am I planning for healthcare costs

Because of their longer life expectancies, women have higher lifetime healthcare outlays than men and a greater need for paid long-term care. Women are often the caregivers for their spouses; when their spouses predecease them, they require paid long-term care at a greater rate. 

That accentuates the virtue of maximizing retirement savings, of course, but women can take additional steps to ensure that high healthcare and long-term-care costs don’t imperil the sustainability of their retirement plans. In addition, greater long-term-care usage suggests that women should be especially thoughtful about developing a long-term-care plan. 

is Morningstar's director of personal finance.

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