Jeff and I were recently talking about my family friend, who I will call Karen. Karen is in her early 50s and works as an executive assistant at a Boston media company. A divorced mom, Karen has a daughter going to Sandwich High School this fall. Karen’s focus for years has been on her daughter and her career. Now she’s concerned that she’s not as well-prepared for retirement as she should be and she has asked for my help.
Jeff and I agreed that sadly, Karen is like many women. She faces daunting challenges when it comes to retirement investments and savings, even more so than most men. Although women have made great strides in the workforce, gender pay disparity remains a significant issue, with women working full-time earning an average of 19.5% less than men for the same work, according to the Institute for Women’s Policy Research. Less pay means women have less capital to invest for retirement. And while the pay gap is decreasing, it’s doing so slowly. Slowly enough for that same study to estimate that women will have to wait until 2059 before wage disparity is no longer an issue.
Women like Karen often pay what you can think of as a “parenting penalty.” Karen took time out from her career to raise her daughter, as many women do. She was married at the time and could afford to do it, but it also meant a significant gap in her professional career. Women have 12 fewer years of earned income, on average, according to the National Center on Caregiving.
That disparity doesn’t just affect women’s ability to set money aside for retirement – it also affects how much they can collect in Social Security benefits (on their own work record) after they retire. After all, the amount Social Security benefit recipients receive is based on their 35 highest years of earnings. With fewer cumulative years of work and less pay to show for it, this puts women at another disadvantage when it comes to preparing for retirement.
Over the years Karen has contributed the maximum amount allowed to her employer’s 401(k) plan. She has other retirement assets as well – brokerage accounts and IRAs, the bulk of which is invested in lower risk asset classes. What’s interesting is that even when they have money to invest, women can be much more risk-averse than men and therefore invest differently, according to TIAA. Women investing outside their retirement accounts tend to gravitate towards assets with traditionally lower risk; often in bonds. They also trade and rebalance their portfolios less frequently, according to the study.
I’ve certainly outlined many of the challenges facing women as they take charge of their retirement. And I understand that, like Karen, if you have faced these challenges, you may be discouraged, but as I have suggested to Karen, there’s a lot you can do to help prepare.
Karen’s first step was to become financially empowered through knowledge. She compiled information on her income and expenses, assets, and liabilities. That helped her get a snapshot of her current financial condition. And although Karen had been proactive with some of her independently-managed investment assets, her 401(k) was a bit of a blind spot. Karen isn’t alone.
In fact, the Transamerica Center for Retirement Studies’ 18th annual Retirement Survey of American Workers shows that 32% of the women polled are “not sure” how their own retirement accounts are invested. Karen was one of those one in three who “set it and forget it,” if you will. Although her 401(k) had grown at a steady rate of return, Karen hadn’t managed it at all.
Karen wrote out her retirement strategy to make it more concrete, and to give herself some actionable goals. She identified her vision of life after work: Some travel, time spent with family, pursuit of her artistic endeavors. Once she’d articulated her plans, Karen was able to outline her post-retirement income needs, her projected costs, expenses (including medical costs), inflation, and risk factors.
This all sounds like common sense, but common sense is not so common. Transamerica’s study shows that only 11% of women and 21% of men have a written retirement strategy. Most folks just guess. But when it comes to your post-retirement financial security and peace of mind, guessing is not good enough.
Like many of us, Karen expects to work until she’s at least 67. That’s when she’ll reach Full Retirement Age (FRA), the age at which Social Security pays 100% of benefits. But many people retire earlier than that, whether it’s due to health reasons or other issues. That’s why it’s equally important to have a backup retirement strategy. Karen’s possible solutions to the “what ifs” in her backup plan include another part-time career, rental income from a vacation property she owns and downsizing her home to a smaller one.
Furthermore, Karen still has time to adjust her investment strategy to one that’s more appropriate to her redefined goals. I have talked to her about reallocating a larger portion of her portfolio to assets with more growth potential. Her previously more conservative approach had preserved her capital very well, but her money wasn’t working for her as effectively as it could be. She’s also purchased an insurance plan with a long-term care rider, an important consideration to help pay for health care costs in retirement – and one that she’ll pay a lower premium for now, while she’s still relatively young.
Like Karen, and as Jeff always says, you should be vigilant and stay alert because you deserve more!
Have a great week!
Susan Roman is and Investment Advisor Representative at Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Susan can be reached at firstname.lastname@example.org.
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