Small changes now can help women retire more comfortably

Q. What special needs do boomer women have in planning for retirement? How do I help my clients overcome these challenges?

A. Everyone is finding preparation for retirement more difficult, but women face challenges that are unique to them. Because women tend to live longer, they have a higher risk than men of outliving their spouse and their income. Women also typically have saved less for retirement, due in part to a lifelong history of statistically lower earnings.

Women's Retirement Challenges

  • Gender Wage Gap - Although the gender wage gap has narrowed by more than one-third since 1960, the average woman today still earns 20 percent less than a man. In 2007, the median weekly earnings of women who were full-time wage and salary workers were $614, or 80 percent of the $766 earned by men. (Source: U.S. Department of Labor Women's Bureau) Over a 35-year working life, this equates to a non-compounded deficit of more than $210,000 in income for the average woman.
  • Fewer Years in Workforce Extends the Gender Earnings Gap - Women are far more likely to leave employment for long stretches to care for children or aging parents. (Source: AARP) Over a lifetime, women work 12 years fewer than men on average. (Source: The Hartford Financial Services Group) This trend contributed to a 62 percent gap between the total earnings for women and men during the 15-year period of 1983-1998. (Source: Institute for Women's Policy Research) Lower earnings over many years present additional challenges for women in saving for retirement.
  • Increased Longevity - On average, a woman at age 65 can expect to live another 22 years, or three years longer than a man of the same age. (Source: U.S. Department of Labor) Women's longevity increases the risk that they will lose purchasing power over time due to inflation and possibly outlive their savings. As a result of increased longevity and lower earnings, the average woman will need to save 2 percent more of her pay than the average man over 30 years to achieve the same standard of living in retirement. (Source: Hewitt Associates)

Planning Strategies for Women

Despite these challenges, small but significant changes now can help many women attain a more comfortable place in retirement. The following recommendations could help your women clients close the gap between the challenges they face today and the retirement security they desire.

Invest early and save as much as possible. Saving more for as long as possible will help women achieve the benefits of long-term compounding to accumulate wealth sufficient to generate a more comfortable retirement income. Although this seems elementary to financial professionals, only about half of America's working adults actually take advantage of 401(k) plans offered by their employers, and women are less likely to participate than men. (Source: AARP)

Social Security contributions and benefits are based on earnings, and because women have historically earned less, their Social Security benefits are also commensurately lower. In 2005, the average Social Security retirement benefit was 32 percent smaller for women than men. While 72.3 percent of women receive a monthly benefit of less than $1,000, more than two thirds (67.8 percent) of men receive more than $1,000 per month. (Source: U.S. Social Security Administration)

In addition, women often rely on Social Security for a higher portion of their retirement income because they are approximately one-third less likely than men to receive income from a pension. (Source: NCPSSM Foundation) For these reasons, personal savings and investments are a more critical component of retirement income for women.

Work a few more years to help your savings last longer. It can be important for women to stay in the work force longer, even late in their careers. Working just another two years beyond the age of 65 can increase projected retirement replacement income levels by 13.5 percent for women who contribute to their 401(k) plans. (Source: Hewitt Associates)

Take advantage of sound advice provided by employers. By and large, women invest more conservatively than men, which can result in lower returns. (Source: U.S. Department of Labor) More employers are realizing that sound advice can keep investors on the right track and help them save more money in the long run. Approximately 43 percent of employers offered online, third-party investment advisory services in 2007, and slightly more planned to do so in 2008. (Source: Hewitt Associates)

Resist the urge to cash out 401(k) plans. Nearly half of employees cash out their 401(k) accounts when they leave a job. Others cash out or borrow to deal with financial emergencies. But early withdrawal from qualified accounts results in taxation at ordinary income rates plus an additional 10 percent penalty. This can result in up to a 50 percent reduction in the previously qualified proceeds.

When leaving a job, the best strategy for both men and women is to roll-over 401(k) accounts into an IRA or a new employer's qualified plan. Employees will benefit most from consistently contributing enough each year to qualify for the maximum company match benefit, which is typically $0.50 for every dollar up to 6 percent of pay per year. (Source: U.S. Department of Labor)

These strategies can help women address with confidence their unique challenges in preparing for retirement. In addition, President Obama signed in late January an amendment of the 1964 Civil Rights Act that seeks to reduce the decades-long disparity between the pay received by men and women. Optimists are looking to this new legislation to provide welcome improvements in the standard of living for women of all ages, including those preparing for retirement.

M. Jason Mattox is executive vice president at Behringer Harvard, a real estate investment company located in Addison, Texas.

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