Bridging the Women’s Retirement Income Gap

Note: This story is sponsored by The Alliance for Lifetime Income.

What do you know about the income gap that many of us face in retirement? The term usually refers to the difference between a person’s expected income and their desired income in retirement, and unfortunately, the gap can be substantial for many women.

Not only do we earn less than men over our lifetimes — about 80 cents on the dollar — our lifespans are also five years longer, which means we’re often faced with the prospect of having to do more with less.

In other words, if we want to achieve parity with men when it comes to retirement savings, we’ll need to save a higher percentage of our salaries. But of course that’s easier said than done — we women spend 65% more time doing unpaid work than men, according to the  Organisation for Economic Co-Operation and Development, and 42% of working mothers say that at some point in their working life, they reduced their hours in order to care for a child or other family member, according to a Pew Research Center survey.

It’s no secret that when women leave the workforce, our earning power is reduced, making it even harder to catch up. Although these stats sound pretty bleak, bridging the retirement income gap isn’t impossible. In fact, it’s easier than you might think.

Here’s a look at a few ways to close it, and feel better than ever about your retirement strategy:

How do you calculate what your “gap” might be?

There are several factors that go into this calculation, explains Alliance for Lifetime Income Research Fellow Gopi Shah Goda, Ph.D., a senior fellow and the deputy director at the Stanford Institute for Economic Policy Research at Stanford University.

First, take a look at what your Social Security income will be.
“There are important implications of decisions to claim Social Security on women that are commonly misunderstood,” she says. Every retiree needs to run the numbers and see when they need to begin claiming Social Security. It may make sense to delay getting your monthly benefit — if you postpone until age 70, your checks can be 67% larger than if you start collecting as early as you’re eligible, at age 62. Also, if you’re married there are additional unique questions to explore. For example, Social Security provides survivor benefits to the second-to-die spouse that are equal to the primary spouse’s benefit. Also, in the case where the primary (higher) earner is male and the surviving spouse is female, the age at which the primary earner claims his benefit will greatly affect his surviving spouse’s well-being in retirement, Goda says.

Once you’ve got your Social Security answers sorted, you need to look at your assumed return on your investments, expected retirement age, and desired lifestyle in retirement, she explains. All of which a financial planner can help you calculate, if you’re uncertain. But perhaps the biggest challenge in getting your calculation “right” is the uncertainty surrounding how long you may live — while health and lifestyle factors play a role, there’s no way to definitively predict longevity.

The Longevity Hedge

One way people deal with the uncertainties surrounding longevity is by taking a portion of their savings and turning it into an income stream by buying an annuity.

You may already be familiar with the concept — annuities pay a certain amount each year someone is alive, and they are commonly known for being able to provide a stream of “protected lifetime income.” This means that no matter how long you live, you can’t outlive your money — an insurance company keeps sending you checks every year you’re alive, just like Social Security. While there are fees associated with purchasing an annuity, many people feel that the cost is worth the sense of security it provides.

Investing for the Future

Another way women can protect themselves against an uncertain future is by investing, explains Kim Dula, partner in accounting firm Friedman LLP.  “It is imperative that women are reaping any benefits that can be had from investing. And maybe more importantly, with investing comes a voice.  Women can choose to invest in things that are important to them, in order to support businesses that may demonstrate values that are near and dear.”

Unfortunately, women just aren’t doing enough of it — according to a survey by digital investment platform Wealthsimple, women invest 40% less money than men do. Why? Well, it’s not because they aren’t great at it— women consistently earn higher returns than men, by around 40 basis points on average), according to a study by Fidelity.

Women consistently earn higher returns than men, by around 40 basis points on average), according to a study by Fidelity.

“Women invest less often than men since many of us feel like we need to be experts to do so,” Dula says. “I have heard over and over that women feel like they need to have all of the answers before they do something. We won’t apply for a job unless we feel that we are fully qualified.  We won’t participate in an activity unless we have studied everything about it. And, we won’t invest in something unless we have done our due diligence and researched all aspects of the investment until we feel satisfied that our money will not be lost. Unfortunately, this reluctance to take a chance can sometimes hinder us from great rewards.”

But investing isn’t just important for women — it’s become more essential for everyone given the decline of defined benefit pensions and the rise of defined contribution employer-sponsored savings plans, Goda explains. “However, given that women live longer than men, the implications for poor investment choices are greater for women than for men.”

Now What?

The best retirement planning involves taking a holistic look at all of your assets, including Social Security, retirement accounts like IRAs and 401(k)s, annuities, and other investments.

You’ve probably heard for years about the importance of diversification in an investment portfolio — the same logic applies when it comes to diversification of your retirement assets. Before you’re ready to leave the workforce, you should figure out exactly how much you have in each category, and how that money will translate to your future lifestyle.

While it’s true that there’s no way to predict longevity, advance planning with your money can help you get out ahead of almost every other unknown.