I grew up with 3 sisters, and no brothers.Let’s just say growing up in a house of 4 girls was an adventure in and ofitself. Getting ready in the morning? Quite the event. Dinner conversations?Even more lively. As the years have gone by, our conversations have evolved tofocus on more significant topics. A recent favorite? Finances and savings.
This topic is of particular interest to mysisters and me because several unique factors can actually work against women when it comes to saving for retirement. It’s important for us to recognize thatthese factors can have a dramatic impact on the amount of assets we accumulateover a lifetime. We need to understand and address any potential hurdles thatmay get in the way of saving, so we can position ourselves to achieve long-termfinancial success.
Lowerwages lead to lost compounding
While research shows the gender pay gap hasdecreased over time, there’s still a notable difference between the averageincomes of women and men. According to a recent U.S. Bureau of Labor Statisticsstudy, a woman working full-time earns roughly 81%, on average, of what hermale counterparts earn.* That means if a woman saves the same percentage of incomeas a man in a similar position, she’ll be saving a smaller dollar amount.Saving less can diminish the benefits of compounding andlead to a much lower portfolio value over the long term.
Feweryears in the workforce
Women are more likely to take time off tocare for children or an elderly relative. They also tend to retire earlier thanmen. As a result, many women spend fewer years in the workforce. What does thismean for retirement? Fewer years earning income and less opportunity forpotential wage growth ultimately results in lower overall savings.
Longerlives and greater expenses in retirement
On average, women live longer than men, whichmeans they’ll need to fund a longer (and most likely, more expensive)retirement. According to the Social Security Administration, a woman whoreaches age 65 today can expect to live until age 87, and that’s just on average.**
While there are obviously benefits to living longer,it’s important to plan for the expenses that will come with these additionalyears. And often these later years are more expensive, as healthcare costsgenerally rise with age.
Realpeople, hypothetical scenarios
To bring the potential impact of thesefactors to life, allow me to introduce my sisters, Brianna, Michaela, andLauren, and my friend Michael. Over the course of their (hypothetical)lifetimes, my sisters will encounter one or more factors that could impacttheir retirement savings.
Michael: The "base" case
Michael begins his career at age 22 with a starting salary of $48,932,the median salary for men working full-time in 2017. His wages increaseannually by 1% in “real” (inflation-adjusted) terms. Michael saves 10% of hissalary each year and earns a 5% real return (after costs) on his investmentportfolio.
Michael retires at age 64 with a portfoliobalance of $809,297. He lives until age 84, which is the average life expectancyfor men.
Brianna: Lower wages
Let’s assume Brianna and Michael have identical situations, with oneexception. When Brianna begins her career, she receives a starting salary of$40,040, the median salary for women working full-time in 2017 (and $8,892 lessthan Michael’s starting salary).
Fast forward to retirement …
Because of that one key difference—lowerwages—Brianna retires with a portfolio balance approximately 18% less thanMichael’s. In order to retire with the same balance as Michael, Brianna wouldneed to save 12.25% of her salary annually.
Michaela: Lower wages and fewer years in the workforce
During her working years, Michaela’ssituation is almost identical to Brianna’s: She begins with a starting salaryof $40,040, and receives an annual increase of 1%. She saves 10% of her salaryeach year and earns a 5% return.
However, at age 31 Michaela leaves theworkforce for 4 years to take care of her children. During this time shedoesn’t receive a salary (and therefore doesn’t experience any wage growth).While her accumulated savings continue to compound, she doesn’t make anyadditional contributions until she returns to the workforce.
Fast forward to retirement …
Michaela retires at age 62, which is 2 yearsearlier than Michael and Brianna. Combined with the 4 years she took off tocare for her children, she spends 6 fewer years in the workforce than they do.Michaela retires with an account balance that’s about 38% less than Michael’s.To match Michael’s portfolio, she’d have to save 16.10% of her salary eachyear.
Lauren: Lower wages, fewer years in the workforce, and a longer retirement
As if being the youngest of 4 girls isn’t hard enough, Laurenexperiences the trifecta of retirement-saving hurdles. Leading up toretirement, Lauren’s situation is identical to Michaela’s: her starting salaryis $40,040, she’s out of the workforce for 4 years to care for her children,and she retires at age 62. However, she outlives Michael, Brianna, and Michaelaby 3 years and needs long-term care during those years.
Fast forward to retirement …
Because Lauren retires 2 years earlier thanMichael and lives 3 years longer, her retirement savings of $501,764 need tolast 5 years longer than his. Additionally, this amount needs to cover someform of long-term care for 3 years. The cost of long-term care can vary, butcurrently the median costs range from about $18,000 to $97,500 per year.***
Overcome potential hurdles by saving more
Women are likely to encounter one or morepotential hurdles when saving for retirement. The good news is that there areways to overcome these hurdles. As the hypothetical scenarios above illustrate,women may want to consider increasing their savings to compensate for lowerwages, fewer years in the workforce, and a longer retirement. A nonworkingspouse can also make contributions to a spousal IRA to savetax efficiently for the future.
Overall, a woman who increases her savingsand takes advantage of compounding can give herself a much better chance ofaccumulating the assets she’ll need in the future.
As for me? I’m saving as much as I can. And Ihope to inspire my sisters to do the same at our next family dinner. As usual,I expect a lively conversation. Wish me luck!
Click here for the original article from Vanguard.