Trade-offs are a part of life, and working women are willing to make a lot of them if it means living comfortably in retirement. Forget the high-end car or luxury trip, women would much rather max out their 401(k)s and IRAs instead. An overwhelming majority (70%) of working women polled by the Alliance for Lifetime Income and HerMoney said they’d opt to save in a 401(K) rather than use $20,500 toward a short term goal. Meanwhile 80% chose investing in an IRA instead of dropping $6,000 on a luxury item. Of the survey respondents, 85% plan to delay collecting Social Security to increase their benefit over time.
But there’s more to it than saving as much as possible. The women know that thanks to compounding, their nest egg can grow more if they’re invested in the stock market. “Compounding is making money on your money,” says Suzanne Norman, a financial literacy expert and education fellow at the Alliance for Lifetime Income. It occurs when the earnings on your savings is reinvested and earns a return. “She who understands it earns it. She who doesn’t, pays it,” says Norman.
WHY WOMEN ARE DOUBLING DOWN
So why are women so focused on saving for retirement? Longevity is one reason. Women live an average of five years longer than men, which means their money has to last longer. They also crave peace of mind, and know that saving is one of the best ways to achieve it.
A greater awareness about the importance of saving for retirement, and a reassessment of what matters are other reasons women are doubling down on their savings. “The pandemic certainly put in perspective what’s important,” says Norman. “My sense is a lot of women are saying I don’t need that Prada purse.” The Alliance for Lifetime Income/HerMoney survey bears this out. Seventy-nine percent of working women said their top trade-off to save for retirement is limiting purchases of high end goods. Millennials are willing to curb memberships and subscriptions and make housing trade-offs to shore up more retirement savings.
A HEALTHY DOSE OF BALANCE
Thankfully, trade-offs don’t have to feel like sacrifices, as long as you are taking a balanced approach. For example, you can’t pour all your money into an IRA and have nothing in the bank to cover an emergency, just in the same way you can’t contribute the majority of your salary to a 401(k) and then not have enough cash flow to cover your daily expenses. If something unexpected occurs, or inflation puts downward pressure on your budget, you’re more likely to draw from an investment account as a result. That means less of your money is working for you and getting the benefit of compounding. “If you don’t have that rainy day fund it’s hard to get money out without penalties,” says Norman. “If you haven’t, do a 360 review and make sure you have enough liquid, accessible money.”
FIRST 401K, THEN IRA
There’s also a trade-off in how you save for retirement. While you want to have your eggs in as many baskets as possible, Norman says the first place you should consider saving money is in a company-sponsored retirement savings account, if one is available. The money is withdrawn automatically from your paycheck and contributions are tax-free, so they have the effect of lowering your taxable income. There’s also the matching component of many 401(k) plans. To recruit workers and help them save, employers match a certain percentage of employees’ contributions, usually from 4 to 6 percent. That’s free money that you can put to work. “I would say that the 401(k) would be my first place. If you have an employer match it’s essentially an unearned bonus,” says Norman. “You get it no matter what.”
After that, she says working women should focus on maxing out an IRA. That’s easier than a 401(k) since the maximum you can contribute is $6,000 in 2022 ($7,00 if you’re 50 or older) and $6,500 ($7,500 for 50+) in 2023. It’s one of the reasons a vast majority of working women would rather funnel $6,000 to their IRA instead of blowing it on a luxury item.
IT PAYS TO DELAY
Delaying Social Security benefits for as long as possible is another smart trade-off working women are willing to make. Woman finally get it. They understand the longer you wait to collect Social Security, the bigger your monthly check will be. While most women can begin collecting benefits as early as age 62, if they wait until age 70 they can get up to 30 percent more in monthly benefits. Yes, that may require them to work longer, spend a little less in retirement, or tap their savings first, but since running out of money isn’t an option, delaying can be a worthy trade-off. “People are understanding that if they just delay and take some income they have in other investments, they can get a pay increase,” says Norman, pointing to annuities as one way to get an income stream in retirement without tapping Social Security. “Use money from an investment account or 401(k) instead of drawing Social Security,” she explains.
Trade-offs don’t have to be painful. Smart ones like maxing out your retirement accounts and delaying Social Security can set you up for peace and prosperity in retirement. Everything in moderation is key, but the more smart trade-offs you can embrace, the better off you and your savings will be.
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