It’s an irony of life many financial planners see every day: women live longer, but they end up having less for retirement. The money has to stretch further and can sometimes run out.
A big part of the problem is the retirement gender gap. We often hear about the “gender gap” in terms of pay and job advancement, but research shows that it also happens in workplace retirement plans.
At the end of 2012, women had $59,300 in their accounts compared to men, who had $100,00 on average, according to global benefits consulting firm Aon Hewitt. Nearly the same number of men and women participated in 401(k) plans, but women saved just 6.9% of pay while men socked away 7.6%.
This isn’t a case of straightforward discrimination; Aon found that women saved less than men across all pay ranges and defaulted at higher rates on 401(k) loans. Because they save less, they often miss out on corporate matching, a double-whammy over the years.
Why does this happen? There are any number of reasons we’ve all heard before. Women take part-time jobs lacking benefits — or a career “time out” to stay home with children — more often than men. We’re also more likely to lend a financial hand to family members. Add in the existing pay gap, and you’ve got the perfect recipe for less retirement savings.
In dual-income families, too, tradition often dictates that the husband take advantage of the employer-matched 401(k) plan. But times are changing. Whoever has the highest dollar-for-dollar company match — wife or husband — should max out their 401(k) contribution first. If you get a better match than your spouse, you should take the lead.
If you don’t have a 401(k) or a pension plan, try putting aside more money every month. According to Aon Hewitt, those without pensions should be saving 15% of their annual take-home pay starting at the age of 25. If you’re 35 already, start socking away 25% of your salary.
I’m a big proponent of automated savings. Consider opening an IRA, a Roth IRA or a similar savings account. You can arrange it so that the money goes right into savings before you even see it.
Which vehicle you choose depends on whether you want to contribute pre-tax dollars and pay taxes on eventual withdrawals (a traditional IRA) or want to make after-tax contributions and withdraw the earnings tax-free (a Roth IRA).
Your 401(k) and the retirement gender gap
Taking advantage of employer-matched 401(k) contributions is a first step toward maximizing your savings. If you haven’t done that yet, talk to someone in human resources. Find out what the matching policy is and consider at least meeting that goal. It’s free money, after all! Anything you contribute beyond that is a bonus.
If you’re starting a new job and have a 401(k) at your old job, you can leave it there. But you should know your options. Are the plan fees at your new job higher or lower? Does it offer a bigger selection of investment choices, or is it mostly expensive, actively managed mutual funds?
Whether or not people roll over their 401(k) often comes down to a plan’s investment options and the associated costs. Fees — fund fees, plan administrator fees and advisor fees — can take a big bite out of your 401(k) savings, so it’s important to understand how much you will pay annually.
One of my clients, for instance, was using a mutual fund company to manage his portfolio. The company was charging him 1.5% and the funds he was invested in were charging 1.25%, for a grand total of 2.75%. Whatever you pay in fees to an active fund manager, that’s how much better the return has to be to match the return on a passively managed index fund.
If your 401(k) is costing you too much, you can consolidate your investment savings and then either self-direct your own investment choices or work with an advisor, such as Rebalance. I’m proud to say that my firm offers low fees, globally diversified portfolios and seasoned, experienced financial advisors who understand these very issues.
Either way, you’ll avoid the pitfall of multiple fees and, in the end, save more money for your investments. And that’s important for women at every age.