Working Women Are Still Falling Behind

we_can_do_itI am the mother of four great children: three girls and one boy. For many years, I worked just one day a week (outside of our home). I did this because my husband and I felt that it was important for one of us to stay home with the children before they started kindergarten. And, I was very lucky to have my mother take care of them on the day I “worked.” Once the youngest two (who are twins) started school five days a week, I began working more and now go into the office four days a week. I’m not going to lie—those days at home with four little ones were the hardest days of my life. My husband likes to remind me that every Wednesday, the day I would “go to work,” I would have the biggest smile on my face. I remember looking forward to adult conversation and drinking a cup of coffee while it was still hot.
My family is certainly not unique. Many people make the decision to have one parent take a break from their careers to raise their children. And more often than not, the mother is the parent who does that. As I just explained, my husband and I made the decision for me to stay home with our children, and I am happy that I was able to do that for so long. But don’t get me wrong: those years were not always easy, financially. With just one income, we often had to sacrifice, as many do. Unfortunately, this is true for most families with one income earner.
A Financial Finesse, Inc. study found that 40 percent of women take time off during their career. The reasons for the break vary from caring for children to switching career directions. Only 10 percent of men, on the other hand, take similar breaks in their careers.
As a result of leaving the work force temporarily, women often lag behind in their retirement savings. Actually, these absences are likely costing women much more than they assume. The research from Financial Finesse, Inc. found that under certain circumstances, outlined below, a 10-year break, early in a woman’s career, can cost upward of $1.3 million in retirement savings. Those women who wait until later in their careers to take an extended absence are also falling behind on their retirement savings, but not by quite as much, just under $1 million.
For the most part, the difference in these figures is due to the compounding interest on long-term investments. To put it simply, money contributed earlier has a longer time horizon to grow. Consequently, the inability to put money away earlier in a career (because a woman leaves her job to have children, for example), leaves a shorter time horizon for that money to grow.
We can take this a step further. Investments made early in a career are often invested more aggressively, because of the recovery time available after a market downturn, before retirement. Fewer contributions during these aggressive years can be a missed opportunity for many investors.
The Financial Finesse report explained that a 25-year-old worker (man or woman), who works full time for 40 years, retiring at age 65, needs to save between $1.5M and $1.7M in order to meet the projected average annual expenditures for a person age 65 and older.
When we look at the amount that needs to be saved annually to meet those goals, we see the challenge that women face. Assuming a median annual salary of $39,000 (at age 25) that grows 3 percent a year, and assuming a rate of return of 6.5 percent before retirement and 4.5 percent after retirement; according to the analysis performed by Financial Finesse, in order to save enough to cover those projected expenses, women need to save 12.6 percent of their annual income, compared to 11.1 percent for men, even if a woman does not take a career break. Why is that? Because women generally have longer life expectancies and higher lifetime healthcare costs than men.
But those 40 percent of women who take a break in their career need to force their savings into overdrive during their working years. Based on those same assumptions, a woman who takes 10 years off early in her career must save approximately 25 percent of her pay annually during her working years to make up for that break. If that decade off from a career is taken during the middle of her career, she must save just over 19 percent of her annual income. That number drops to 16 percent, if the break is taken late in her career.
Of course, there are things that a woman can do to combat the seemingly uphill battle in her retirement planning. It starts with maxing out employer contributions during those working years and having spousal contributions made to a Traditional IRA during the years she is not working, if eligible for such a contribution.
Although Seth and I will encourage all of our children to work toward financial independence, we will never tell our daughters (or our son) that they should not take time off from their careers to raise their kids. We will never regret our decision for me to do that. We will, however, remind them of the importance of making smart financial decisions and saving as much as possible as early as possible—to counter the effects of any such decision.
In general, with the hurdles all women face in their financial lifetime, and the reality of those career breaks, women need to be even more vigilant and alert with their financial planning.