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Closing the Retirement Plan Contribution Gap

Living five to eight years longer than men, women have quite a bit more life to fund in retirement. Yet on average, women hold less in their 401(k)s – $73,100 compared with their male counterparts’ $108,800.

What’s more, 45 percent of women aren’t doing anything to save for retirement beyond contributing to their employer-sponsored plans, and 92 percent of working households don’t meet conservative retirement savings targets.

The result: Only 14 percent of women say they’re “very confident” in their ability to fully retire with a comfortable lifestyle. Tax-deferred accounts aren’t the end-all, be-all of retirement planning, but without a sizeable 401(k) or IRA, it will be tough for the average middle- or upper-class woman to maintain her quality of life in retirement – with or without the help of a spouse.

Fortunately, many working women have the means to contribute more and take more market risk, setting themselves up for higher incomes and lower longevity risk in retirement. And even those who spend a decade or more out of the workforce can leverage alternative options to consistently grow their nest eggs.

Who saves more?

In terms of percentage of income saved, women tend to be better investors than men: They save 9 percent of their salaries annually and earn a 6.4 percent rate of return, according to Fidelity, compared with 8.6 and 6 percent for men, respectively. Until she starts earning over $150,000 a year, a working woman in any given income range also has higher participation rates and a higher 401(k) balance.

Remove the income filter, however, and men have significantly more stashed away. There’s a 32 percent difference in savings across all ages and income levels between men and women. Even among employees who have stuck with their employers for 10 years or more, women have saved 28 percent less than men.

Why the disparity?

Women tend to spend about 12 years out of the workforce, and of course that’s going to impact their 401(k) contributions, IRA contributions and projected Social Security benefits,” says Steve Parnell, director of strategic markets for Hartford Funds.

Men also tend to make more money than women – around 20 percent more. Combine that disparity with a decade spent raising children and working part time – or not at all – and women will end up with significantly less in their tax-deferred accounts by the time they reach retirement.

Mind the gap

Despite the stereotype that women are more risk-averse then men, their rates of return aren’t too far apart: 10.1 percent for men and 9.7 percent for women, not controlling for income. Vanguard data show that, while men tend to hold more company stock and women more target-date funds, overall equity allocations are almost identical between the two sexes.

With fewer funds and years to contribute, however, women may actually need a higher equity allocation than men, at least for a portion of their working lives.

“You need to take more risk when you have more time and need to make the money last longer,” says Parnell.

Likewise, contributing a higher proportion of income to a 401(k) is a safe bet. A scant 10 percent of participants max out, according to Vanguard, and one in four employees don’t save enough to get the full employer match. Few workers can afford to leave that money on the table. Women can afford it least of all.

Mindset and education

Contributing more and taking more risk is easier said than done, of course. And if funding a few extra years of retirement was that simple, clients would already be doing it. Right?

Actually, “women tend to feel they don’t know enough, and they’re not as aggressive out of the gate, so they’ll be conservative with their investments until they get some advice and encouragement,” says Lou Cannataro of Cannataro Park Avenue Financial.

Fortunately, female clients are eager for education. While about three-quarters of women say they don’t know as much as they should about retirement investing, even more say financial education would give them greater confidence in managing their money.

“Advice and education are true value-adds,” says Cannataro. “When clients get on track, they will stay on track as long as you continue to provide service and advice.”

There are benefits for your clients: While only one in three women uses a professional advisor, those who do generate more than 50 percent greater savings, on average.

Alternative options

Whether they’re part time, self-employed or unemployed, women who can’t max out their 401(k)s still have a few options for building their nest eggs.

“You’re typically eligible for a 401(k) at 1,000 hours per year, which works out to just 19 hours per week,” says Parnell. “Often, the employer will still make matching contributions, and you can still contribute.”

For business owners and their spouses, there’s also the Solo 401(k), which has the same $18,000 annual contribution limit as its traditional counterpart. The business can also make a 20 to 25 percent profit sharing contribution, which brings the total annual savings to $54,000.

Finally, married women who leave the workforce can leverage their spousal IRAs.

“You can have no taxable income and still save $5,500 per year – $6,500 if you’re over 50,” says Parnell.

The holistic plan

Limited by maximum contributions or available funds, any woman will only be able to contribute so much to a 401(k) or IRA, and those contributions will have an unlimited growth potential over the course of her career.

To make the most of those funds and hedge against longevity risk, she’ll need a comprehensive retirement plan that includes a few other strategies: HSAs, Roth accounts and other after-tax investments; real estate, an annuity or other long-term income vehicle; and a spending and drawdown strategy that reduces taxes and maximizes growth.

Additionally, the reality for today and tomorrow’s long-lived retirees is that working longer may be a necessity.

“If there’s a way to delay retirement to any greater degree, say beyond 62 all the way to 68 or 70, that’s what I advise,” says Parnell. “I know it’s not the way your parents retired, but our life expectancies are greater than theirs.”

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