At Springwater, we’re fortunate to count many “independent” women among our clients. For us, “independent” simply means that they rely on their own financial resources to support themselves. Some are widowed, some divorced, and some never married. They vary in age from their 50s to their 80s. Over the years, we’ve discovered how retirement planning for women is different, and incredibly important. Here’s why.
Women Live Longer
We all know that women live longer than men. If you’re a woman, the World Health Organization reports that you will live, on average, six to eight years longer than men. Newborn girls are more likely to reach their first birthday than newborn boys. The trend continues throughout life, as women outlive men at every age. In the United States women live, on average, to age 81. Men, in contrast, live to an average age of 76. If you’ve ever visited a retirement community, you quickly see that women outnumber men. Average life expectancy in the US has actually declined in the past few years. But that is a topic for another day. The fact that women live longer than men means that retirement planning for women is particularly important.
Women Earn Less
Despite the significant gains that women have made in the workforce, they continue to earn less than men. The Institute for Women’s Policy Research reports that women earn less than half of what men earn. There are a variety of reasons for this disparity. Women with children are typically the parent who takes primarily responsibility for their care. While women are increasingly continuing to work while simultaneously raising a family, it’s still common for a woman to step out of the workforce to raise their kids. By stepping out, women put their careers on hold, and as a result their earnings levels stagnate. Men usually remain in the workforce during their parenting years, and their earnings continue to increase over time. Women are also more likely than men to step out of the work force to care for elderly parents. They usually do this later in their careers, just when they could be maximizing their earnings.
Another factor that explains the gender wage gap is that, historically, women were not as well-educated as men and, as a consequence, were not able to secure the high-paying jobs available to better-educated men. This is changing as women are increasingly earning more undergraduate and graduate degrees than men. There is also, put very simply, gender discrimination in our society which, while not as pronounced as it was in the past, continues to hinder women as they seek equal pay for equal work. Because women earn less, they save less and because they save less, retirement planning is more challenging.
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Women Receive Lower Social Security Benefits
Women receive lower Social Security benefits than men. The Social Security Administration reports that, in 2017, the average Social Security income received by women 65 years and older was $14,353, compared to $18,041 for men. Why? As we’ve discussed here, women typically spend fewer years in the workforce than men, and they generally earn less. As a result, they pay less into Social Security and earn fewer benefits credits. Because Social Security is a progressive system, women actually receive a higher percentage benefit than men who have higher earnings. But this is of little comfort. The Administration reports that, in 2017, Social Security benefits comprised 45% of the total income received by unmarried (including widowed) women, and 48% of these women relied on Social Security for at least 90% of their income. So, while some women are highly dependent on Social Security, the benefits they receive are relatively meager. This is yet another reason why retirement planning for women is so important.
Women Save Less
Because women work fewer years and earn less than men, it’s not surprising that they’re unable to save as much for retirement. They’re less likely than men to qualify to participate in their employer’s retirement plans. If they are eligible, they’re less able than men to save in those plans, because they earn less. Defined benefit pension plans, which pay out a stream of monthly income for life, are far less common in the United States than they were during the period from 1940 to 1980. These retirement plans provided far greater financial security for workers than today’s more common defined contribution (e.g. 401(k) and 403(b)) plans. The Transamerica Center for Retirement Studies recently reported that women have saved an average of only $23,000 for retirement. The report also indicates that women believe that they’ll need $500,000 to be financially secure in retirement. So, the gap between what women have and what they think they’ll need is enormous.
Women are More Conservative Investors
The conventional thinking in the investment industry is that women are more conservative investors than men. There are various explanations for this. Women are often nurturers and protectors by nature, and in this role they’re attuned to avoiding risk. Women are also generally not as knowledgeable about investing. So, they may avoid risky investments they don’t understand. As noted previously, women earn less and save less. So, they’re often more protective of what they have than men. Culturally, women simply appear to be more risk-averse than men, and it may be that this difference can at least in part be traced back to human evolution.
At Springwater, we’re not convinced that women are inherently more conservative investors than men. All of our clients complete an investor risk profile which gives us some insights into the client’s willingness to accept the inherent riskiness of investing in the stock market. We find that women are generally more conservative than men. Having said that, we also have many female clients who are very comfortable with investment-related risk. What really matters is determining how much investment risk you must take, in order to reach your financial goals and live comfortably in retirement. The challenge is that women often must take relatively more risk, because they’ve saved less, they’ll need more, and they’ll live longer, than men.
Everyone needs to save for retirement, and most American are woefully unprepared for it. Retirement planning for women is even more important, because of their unique circumstances.