The Real Cost Of The Pay Gap: Less Money In Retirement

Here’s a news flash: Unequal pay for women can mean unequal retirement.

It’s common knowledge that women earn less than their male peers, about 77 cents on the dollar, the so-called “pay gap.” What’s less appreciated is the danger of when they earn less: The high-earning years in mid-career, when most people first get serious about putting away money.

Until the age of 35, women earn almost as much as men — about 90% of the median wage, according to a 2013 report by the American Association of University Women. After that, it’s all downhill on the pay scale, with the biggest disparity occurring for women 45- to 54-years-old, prime retirement savings years.

There are several factors working against women in the struggle to save more:

  • Women tend to exit the workforce voluntarily, spending on average 12 years raising children or caring for elderly parents. That’s years of no earnings at all.
  • When they re-enter, it’s often at a lower pay level. A decade out of the professional workforce can be a career-killer, many find.
  • Women who return are more likely to choose flexible schedules and meaningful — as opposed to strictly lucrative — work, choices which often translate into lower salaries and less financial security.
  • Finally, many women don’t save with a certain retirement lifestyle in mind. Instead, they save with the goal of not becoming a financial burden to their families.

Unfortunately, just 42% of women sock away money every month. And as women age they’re more likely to be saving on their own — whether through divorce or death or by not having married. According to the Census Bureau, more than a third (35%) of women from 55 to 59 are single, as are 38% of women 60 to 64. The numbers increase as women age.

Meanwhile, life expectancy is only growing, ironically in favor of women. So how can a woman plan better for a comfortable retirement? Time is the really big factor.

Save more, save sooner

There’s no magic formula for coming up with a sound retirement strategy. Everyone, men and women alike, should save early and often with the future in mind. When it comes to saving, you should have a plan in place sooner rather than later.

Time literally is money. If you know that your employment path is going to be less lucrative, then it becomes doubly important to sock away cash early in order to give it time to grow through compounding. More than a rising market or investing smarts, time in the market is a real factor in long-term retirement plan success.

So is taking advantage of tax breaks. If, for instance, you are married but don’t work, you can still build a nest egg. A spousal IRA is one way to do it. Also known as a Kay Bailey Hutchison IRA after the longtime Texas senator, a spousal IRA allows a working spouse to contribute to an IRA in the non-working spouse’s name.

That IRA is yours — and yours only — no matter what happens. You own it, even if your spouse made all the contributions. You also can contribute to a Roth IRA, as long as your combined income and age meet the criteria. It’s after-tax money today, but those contributions grow tax-free and the money you take out later in life also is tax-free.

Getting started

If you work and your company offers a 401(k), take advantage of it. That’s tax-free money! Yet many women work for small businesses that have little to offer their employees. If your company doesn’t have a plan, consider opening a traditional IRA and a Roth IRA and making your own contributions.

Another key idea: Diversify your investment portfolio. Too often, women are poorly advised and get stuck in expensive mutual funds or highly concentrated investments that won’t produce the kind of safe, long-term performance that they need to retire well.

If you don’t have an investment portfolio, there’s no time like the present to talk to an advisor. The point is to start, even if it’s just a conversation about where you are. Taking those first steps can give you the confidence to make the choices today that will set the stage for all of the tomorrows ahead.

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