When it comes to saving for retirement, women might be pleased to learn that they are more likely to enroll in their workplace savings plans than men and to save at higher rates. That’s the good news, according to a study released in November 2015 by investment management company Vanguard.
The not-so-good news is that, even though women are setting aside a higher percentage of their incomes for retirement, their account balances remain smaller than those of male workers. In fact, Vanguard found that men who participated in workplace savings plans had account balances that were 50 percent larger on average than women participants’ balances.
What’s more troubling is that a separate study by Financial Finesse — a workplace financial wellness provider — showed that women’s shortfalls in retirement savings were exacerbated by the fact that they need bigger nest eggs than men. Not only do women live longer, but they also have higher health care costs throughout their lives.
“If you as a woman want to ensure your financial independence, you have to save more than a man does,” said Kelley Long, a certified financial planner with Financial Finesse.
How much more? According to Long, Financial Finesse estimates that women need to save 26 cents more on the dollar than men to replace 70 percent of their income in retirement and cover health care costs. In light of these figures, it’s essential that women take steps to overcome the retirement wage gap.
How Women Can Save More
When it comes to retirement saving, women are already doing a lot of the right things, Long said. As the Vanguard study found, women are 11 percent more likely than men to participate in workplace saving plans. With plans with voluntary enrollment, they are 14 percent more likely to join than men. Further, those who participate save at rates 7 percent to 16 percent higher than their male counterparts. Women’s investment returns over the past five years have also been on par with those of men.
While women are surpassing men in some aspects of retirement saving, research shows that they are lagging behind where it really matters — the amount they are actually putting aside. According to Jean Young, senior research analyst at the Vanguard Center for Retirement Research and author of the latest study, the discrepancy stems from varying income levels.
“Men have always had higher balances, but it’s a function of wages,” said Young. According to her study, the men who participated in workplace savings plans had wages that were 25 percent to 33 percent higher than women. However, when the authors controlled for differences in income, the retirement savings gap between men and women all but disappeared.
Still, both men and women need to save more if they hope to live comfortably in retirement. “At the end of the day, everyone would be better off saving more,” Young said.
This doesn’t mean you won’t ever be able to retire, said Long, who stressed that individuals still have time to make changes for the better. According to Long, “Little tweaks can make a huge difference.”
Run the Numbers to See If You’re Saving Enough
Many people simply don’t know if they’re saving enough for retirement. According to Long, half of her financial planning clients have never done any sort of retirement calculation prior to meeting. If you haven’t done a savings projection already, Long said that this is a wise place to start.
Of course, the amount you will need depends on various factors including the lifestyle you want to have in retirement and how much you plan to spend. According to Long, a good rule of thumb is that you should save 10 to 16 times your annual income. Don’t forget to factor in the value of Social Security benefits, as they will constitute a big portion of your savings.
A free online tool such as the Vanguard Retirement Income Calculator or the Financial Finesse Retirement Estimator can help you run the numbers to see if you’re on track for retirement. You can also check to see if your workplace retirement plan administrator offers an online calculator. Once you have an idea of how much you need to save, you might be more motivated to boost your actual contributions.
Once money reaches your checking account, it’s easy to spend it on bills and other expenses. Instead of giving yourself a choice to set aside money every month, automate your savings so that contributions to your workplace retirement plan are withdrawn from your paycheck. You can also set up automatic deposits from your checking account to a retirement savings account, such as an individual retirement account.
With this approach, the money is deposited into savings before you have a chance to spend it. “It’s the true pay-yourself-first scenario,” Young said.
Contribute Enough to Get an Employer Match
The Financial Finesse study found that fewer women than men report taking advantage of their companies’ retirement plan matching, which means they’re essentially leaving free money on the table.
To make the most of this saving opportunity, check with your human resources or benefits department to find out if your employer offers a 401k match and how that match is determined. The most common type of match is 50 cents for every $1 contributed by an employee, up to a certain percentage of salary — typically 6 percent, according to 401khelpcenter.com. Contributing enough to get your employer’s full match is an easy way to boost retirement savings significantly.
Increase Contributions Annually
It’s easier to save income that you aren’t used to having in the first place. One of the best ways to boost your annual contributions is to set aside money from raises and bonuses, said Long, who went on to advise that employees elect to have contributions automatically increased each year.
Ideally, both women and men should aim to set aside 12 percent to 15 percent of their income annually (including employer contributions), according to Young.
“It’s not as painful as you might think to increase the amount you’re saving,” Young said, stressing that those who reach this level of savings sooner in their lives are more likely to accumulate enough for a comfortable retirement.
Choose the Right Investments
When it comes to investing, women tend to be less confident than men, according to Financial Finesse. If you’re worried you won’t choose the right investments for your retirement portfolio, you might want to consider target-date investments, according to Long.
Target-date funds gradually shift from more aggressive holdings that offer growth to more conservative investments that reduce risk as your retirement date approaches. Vanguard research has found that investors who use these and other professionally managed funds enjoy better outcomes than those who construct portfolios on their own.
Don’t Borrow From Your 401k
A greater percentage of women than men surveyed by Financial Finesse reported having taken out loans from their retirement plans. Although individuals can borrow up to half of their 401k balances for a maximum of $50,000, they will ultimately have to repay themselves with interest, which can be lower than the rate of return they would have received if the money was left in the account. Ultimately, by taking out these loans, you’re shortchanging your retirement savings.
Related: How to Update Your 401K
Stay the Course
If your account balance drops because of a downturn in the stock market, it’s important not to panic and pull out your money — this is especially essential if you’re years away from retirement. If you cash out your account while the market is down, you will have missed out on an opportunity for your investments and account balance to rebound, and you’ll be paying higher prices to get back in, according to Long.
So when the market dips, “remember that the next time you put money in, you’re buying stocks on sale,” Long said. Continue your savings efforts so you can retire comfortably, confidently and securely when the time comes.