Everyone knows that almost no one is saving enough for retirement these days. What may be a surprise is that women trail men in retirement savings by a hefty margin, and are more likely to default on loans from retirement plans than men.
But why does this happen? And, perhaps more important, what can be done about it?
First, here are the facts, according a study from Aon Hewitt, which found that women not only save less — 6.9 percent compared to men’s 7.6 percent — and have average retirement balances of only $59,300 compared with men’s average balances of $100,000, but a third also fail to take full advantage of employer matches. Only a quarter of men fail to rake in as much as their employers will give.
According to Olivia Mitchell, International Foundation of Employee Benefit Plans Professor at the Wharton School of the University of Pennsylvania, women fall behind men in planning for retirement for lots of reasons: “They earn less; have less time in the labor force because they take time out for families; they’re also less likely to have a company-sponsored pension or have the opportunity to contribute to a pension,” she said.
The problem, she said, is serious because women tend to live longer than men, “so they need more savings, if anything, to last a longer time.”
As offensive as the idea might sound, women’s financial literacy is simply not as good as men’s. And that’s true, Mitchell said, across the globe, not just in the U.S. Citing the results of a global study that asked “very simple questions in about 25 different countries,” she said, “we have a pretty global picture of financial literacy differences.” And they are legion.
“Women are less likely to understand compound interest, which is central to things like credit cards, mortgages, student loans — you name it,” she began. They’re also “slightly less informed about inflation — there’s not too much of a difference there, but they’re (also) much less aware of risk diversification. That would lead women to put too much money into a single asset: a home, for example, and not to diversify across different categories.”
Another issue is that “traditionally women have relied on their partners or spouses to handle financial affairs, and even though that’s less common than it was 30 years ago, it’s still widespread.”
Women “don’t establish credit in their own names, or have a separate checking account; that makes it difficult to establish credit if and when they need it, such as in case of a divorce or the death of a spouse. They have no experience, and may not even know the pin number for the (husband’s) online account.”
Women are also more likely to draw on retirement savings to meet other emergency expenses, and then are often caught short if they leave for a new employer — or are laid off — and cannot pay back the lump sum that they borrowed.
According to Patti Balthazor Björk, director of retirement research at Aon Hewitt, women “do tend to take loans and withdrawals at higher rates than men.” And the default rate for women is higher, too.
“They’re in and out of the workforce a little more, and if there’s a loan outstanding, they have to pay it off typically within 60 days, unless the administrator can do direct debit or take checks,” said Björk. “And that’s difficult.”
As a result, women not only lose the money from retirement savings, but because they can’t replace it on time, they also get taxed on the withdrawal. Björk added that “71 percent of women who terminate with a loan outstanding would default on the loan, compared with 64 percent of men.”
For that matter, those absences from the workforce often mean that women are in lower-paying jobs; not only does that mean they could be working for employers who may not even offer the option to save for retirement, but that they’ll have less ability to put away a portion of what they earn.
Annamaria Lusardi, the Denit Trust Distinguished Scholar in Economics and Accountancy atGeorgeWashingtonUniversity, who has worked with Mitchell on numerous projects, adds that not only do women suffer from low financial literacy, but they also have low confidence in what knowledge they do have.
In a project she worked on at Dartmouth University several years ago that was aimed at getting Dartmouth employees to contribute more to their supplemental retirement accounts, she says several interesting trends surfaced via in-depth focus groups and interviews.