Why Women are More Likely to Run Out of Retirement Money
When Danielle contacted me about writing a guest post about women running out of money, my initial reaction was no. It seemed a little too controversial. But the more I thought about this topic, the more I liked it.
Money management is different for both men and women. The fact is we both won't have the exact same philosophies on money, and likewise, our experiences and perspectives will be altered because of those experiences. I had to hear what she had to say about this topic.
And after reading it, I couldn't help but post it. It's thoughtful and insightful, and best of all, it's written about women...by a woman.
Danielle, take it away!
Take a second to think about the inspirational quotes on your Instagram feed or the motivational books on your bookshelf. I’ll bet you see many of them goes something like, “You only have so much time, so make the most of it.”
Does that sound about right?
As women, we are inundated with mantras and advice on living our lives and living them to the fullest. But what if I told you that as a woman, you might run out of money before your time is up if you follow that advice?
Research shows that it’s true. You are much more likely to run out of money in retirement than your male counterpart.
The odds are against you but not all is lost. The good news is that if you make the right financial moves now, you can carry on living your best life and have enough money to do it.
The Sobering Facts
They say knowledge is power so let’s dive into some firm facts. Income, debt, life expectancy, and investing habits all contribute to the risk of women running out of retirement. We’ll take them one by one.
Income
You Take Home Less Money
It is no secret that on average women earn less than men, even though we now make up half of the American workforce. According to the Bureau of Labor Statistics (BLS), women are responsible for almost half of the entire U.S. workforce and are the sole breadwinners in 40% of American households.
On top of that, more women than men attend college in the U.S. and we enter the workforce accordingly.
Yet even with those numbers in play, the data shows that on average we still earn less than men in virtually every industry. Inevitability, less income equals fewer contributions made to retirement.
Another report from the BLS showed that in 2016, women ages 25 to 35 made slightly less than 89 cents to every man’s dollar. This is a notable drop from 2011 where that same age group of women was making 92 cents to every dollar.
Earning less means less disposable income to stash away in a 401(k) or other savings accounts. There is no question that this wage gap in modern America significantly affects today’s retirees.
In 2016, the median income of Americans over age 65 was $31,618 for males and $18,380 for females. In fact, according to according to the National Women’s Law Center there are twice as many women 65 and older (2.6 million) living in poverty than there are men (1.3 million).
So maybe it is safe to say, rather than women being likely to run out of money in retirement, women are running out of money in retirement.
Social Security
Ah, Social Security. These benefits add a whole other side to the equation, especially for single women. Your Social Security benefit is calculated by the average indexed monthly earnings over the 35 years that you brought in the most income. A basic benefit is then calculated based upon these numbers that determines what you will get in retirement.
Since women earn less, their Social Security benefits in retirement are also less. While married women can claim some benefits based on their spouse’s earnings, women who have never married do not have this luxury.
The Social Security Administration reported that in 2012, the average benefits received by women 65 and older was $12,520 a year while men received an average of $16,398 a year. Don’t break out your calculator: that is a staggering $3,878 gap.
Of course, there are other factors (besides the wage gap) that can impact these numbers. Women often take leave from the workforce at different times to take care of children or aging parents. Some women take long periods of time off for maternity or caregiving. Often, they never return to the same pay they earned prior to their leave, having a direct impact on their earnings record for Social Security benefits.
Your Social Security benefit will vary upon your circumstances, but it is not something you want to count on covering all your costs in retirement.
Debt
Adding to the struggle, women carry significantly more debt than men. From student loan debt to consumer debt, we take the cake on having more liabilities to our name than men do.
When it comes to student loans specifically, CNBC reports that women in the U.S. hold two-thirds of all student loan debt. This comes back to two things I mentioned earlier: more women go to college than men and then tend to earn less after.
More debt. Less money to pay it back.
When you are designating a significant portion of your income to repay loans, adding to your 401k becomes one of those things you will do “someday”.
Life Expectancy
Living a long life is something we all aspire to, but then again when you live longer, you spend longer. As overall life expectancy grows in the U.S., our retirement funds need to do the same.
Women live longer
On average, women can expect to get a little more from Father Time than men do. The National Center for Health Statistics reports that in 2016 women turning age 65 had an average life expectancy of an additional 20.6 years left to live compared to the 18 years for men.
It may not sound like a lot, but we are talking about averages here, so the chances are that you will live longer than the guy standing next to you.
The longer you live, the more money you need.
Healthcare costs
That leads me right into one of the most important things you are going to need money for in retirement: healthcare.
Fidelity recently released some staggering numbers on what healthcare could cost you in retirement. They estimate that a couple set to retire in 2018 will need $280,000 to pay for medical bills in retirement.
Furthermore, if you are not yet at retirement age, you can expect that number to be even bigger by the time you get there.
While Medicare will cover some of your healthcare costs, you may not realize that Medicare has significant monthly premiums that you’ll pay for outpatient and drug coverage. What’s more is that you’ll have deductibles, copays, and coinsurance to pay as you use your Medicare benefits as well.
Additionally, long-term care is one of the most expensive and prevalent costs that seniors pay for. Medicare does not cover long-term care in a nursing home or assisted living facility, and it generally covers home health care only when skilled nursing is required. If you need help with just bathing, dressing, or even basic necessities like putting on a hospital gown or moving around your home, Original Medicare does not pay for these custodial types of care.
The moral of the story is that you need a large nest egg just to cover your healthcare costs in retirement.
Investing
When you think of investing, do you feel some anxiety mixed with a little regret? You’re not alone. We know we need to be investing, but it just tends to be last on our to-do list.
We are busy making sure that things are in order at home and often we feel that once we have all of that in order, then we’ll start investing more. Too often, that day doesn’t come, and if it does, we tend to play it safe.
We choose lower risk
According to the Journal of Financial Counseling and Planning, women not only invest less of their money into retirement, but we also choose far less risky investment vehicles.
A financial planning site, LearnVest, collected data on 100,000 people and reported that 45% of men feel financially confident while only 27% of women said the same.
We could debate our genetic makeup or the fact that we are preparing for the worst, but the reality is by investing less of our incomes (6% compared to the 10% men do), we are losing out on years of compounding interest that could be expanding our nest egg.
How to Beat the Odds
If you’re still reading this, you’ve made it through all of the unnerving facts. Now on to the good stuff. There is no better time than now to take control of your finances and turn any worry about your retirement into some motivation to beat the odds.
Start Today
You’ve seen those charts that show what will happen to Sally if she starts saving at 25 versus Harry who didn’t start saving until he was 35. I am not going to show you one of those, but I will tell you that today is the best time to get to work on your retirement plan.
When it comes to compounding interest, time is your best friend. No matter what age you are, $100 invested today will be more in retirement than waiting to invest that same $100 next year.
My hope is that you can start saving immediately. Most of us have at least one thing we could give up in exchange for a little extra to put in our retirement.
Business Insider gives some good pointers on savings marks to aim for in each decade of life:
- In your 20’s – save 10% of your gross income and have emergency savings of 3 months’ worth your expenses
- In your 30’s – save 12.5% of your gross income and have emergency savings of 3-6 months’ worth your expenses
- In Your 40’s – save 15% of your gross income and have emergency savings of 6-12 months’ worth your expenses
- In Your 50’s – save 20% of your gross income and have emergency savings of 12-24 months’ worth your expenses
- In Your 60’s – if you have stayed diligent, the hope is that by this time you will be able to enjoy more money and free time
Whether you can save a lot more than this or a lot less than this, do what you can with what you have, today.
Pay Down Your Debt
Start paying down your debt and stop getting into further debt. Just as that compounding interest we were talking about earlier can help you, it can also hurt you when you owe money. If you are bogged down with debt, you are likely paying interest on it. The longer the debt is owned by you, the more interest you dish out.
The sooner you climb out of the debt hole, the better chance you have at throwing more towards retirement.
Rather than stressing about the amount of debt you have, devise a plan. There are many experts out there that can give you excellent tips on how to organize your debt in a way that you can focus on one debt at a time, but ultimately it is going to take your willpower to get out for good.
Create a Roadmap
You know that old under-promise over-deliver saying? Do yourself a favor and over-deliver for your retirement.
When it comes to creating a plan, the best thing you can do is to talk to a financial planner. Find someone that is licensed and whose job it is to have your best interest in mind. A planner can help you design a full roadmap of your financial future and help you determine how much of your income you should be socking away each month.
If no matter how you work the numbers, you just don’t have enough to save, then you may need to add job hunting for a better salary to your roadmap. You are the one in the driver’s seat. The main thing is to take action.
Understand your retirement plan
Along with our tendencies as women to invest less, we also tend to not fully inquire about where the money we are investing is going.
If you can contribute to a 401k through your employer, this is the best place to start investing. The tax advantages will help your money grow faster and if you receive an employer match, that’s even better.
Whether your money goes into a 401k, IRA, HSA, or another portfolio designated by your financial planner, you should know exactly where your money is going.
Ask your financial planner to send you monthly statements and if something doesn’t add up or you aren’t sure why your money is in a specific fund, ask!
You must be an advocate for your money and understand why it is doing what it’s doing. If this sounds overwhelming, sign up for a free beginner’s finance course online. There are dozens of them to choose from.
Understand the cost of healthcare
Earlier I shared that huge (but real) number of $280,000 being the amount that couples today can expect to pay for healthcare in retirement. If you are not retiring today, you need to plan for even more of a healthcare nest egg in order to keep up with inflation.
If you are planning to retire before you turn 65, this number would be even greater as you’ll also need to pay for health insurance until you reach age 65 and become eligible for Medicare.
In fact, Fidelity reported that 33% of early retirees that choose to claim Social Security benefits at age 62, say that they do this to be able to pay for healthcare until they age into Medicare at 65.
However, if you can save enough earlier in life so that you can postpone withdrawing your Social Security until you reach your 70th birthday, you monthly income benefits will be much larger.
You don’t want to spend your final years worrying about how you are going to cover your medical expenses or worse, pass the burden of those expenses onto your family.
The Takeaways
Your biggest risk is no longer dying. It is living longer than you expected and running out of money while you’re alive.
The odds are in your favor when it comes to living out the life mantras from your Instagram feed, but they are against you if you don’t take the reigns of your retirement savings today.
We are fortunate to be in a society that is changing and becoming more cognizant of the gender gaps that still exist. While there are some things outside of our control, there is certainly much in our control that we can get started with.
Whether you are reading this at age 20 or 60, there are steps you can take today to help ensure that your money lives as long as you do.
Danielle Roberts is co-founder at Boomer Benefits, where she and her team help baby boomers set up Medicare supplemental insurance to help cover the costs of healthcare in retirement.