Squared Away Blog

October 6, 2011

Women Lag in Retirement Readiness

When it comes to retirement, we women are in lousy shape.

We live longer, so will need more money when we retire. Yet we work less over our lifetimes and earn 80 percent of what men earn while we are working. As a result, we’ve saved less in our 401(k)s and IRAs.

Not surprisingly, the rising economic insecurity among all Americans ushered in by the Great Recession is more pronounced among women, according to reports Monday by the Institute for Women’s Policy Research (IWPR) in Washington:

• 58 percent of women interviewed by IWPR were concerned they would not have enough to live on in retirement, compared with 43 percent of men;

• 47 percent of women lacked confidence that their resources would last throughout their retirement, compared with 35 percent of men;

• 51 percent of women worried they would not be able to afford retiree healthcare, compared with 44 percent of men.

Financial data support women’s concerns. In 2010, the average balance in defined-contribution plans managed by Vanguard Group, one of the nation’s largest mutual fund companies, was $58,833 for women and $95,675 for men. The median balance was $21,499 for women and $33,547 for men.

Women’s personal retirement savings are even lower, relative to men’s, when one considers that women live much longer. Among women born in 1935, 51 percent are expected to live until age 85 – just 36 percent of men will, according to the Center for Retirement Research at Boston College, which hosts this blog. Fully 13 percent of women will make it all the way to 95 – only 6 percent of men will.

Things aren’t as bad as these numbers suggest since married couples presumably share their 401(k) savings. But wives have no legal claim on his assets. And a woman who marries an older man, which is common, may also find that she falls in second behind his children from a previous marriage.

And it’s not the 1950s anymore either: half of women now live without a spouse. Record numbers of women are on their own when it comes to financial planning.

Numerous retirement issues are unique to women, and this blog post only scratches the surface.

Since women tend to live longer than men – they have more “longevity risk” – financial experts say women are at in danger of running out of money if they draw down their savings too quickly. Women have options to manage this risk and soften the financial blow: for example, they can purchase annuities, and there are even relatively inexpensive annuities that don’t start paying out until they turn 85.

We save less than men, partly because we earn less but also because we are more likely to migrate in and out of the workplace to take care of children or elderly parents. Social Security compensates for that. The lower one’s income during one’s working years, the higher percentage of that income Social Security replaces. However, moving in and out of the workforce can also reduce a woman’s monthly Social Security check. Each full year that a woman drops out is a year of “zero earnings,” which Social Security uses in its formula to calculate the size of retirees’ monthly benefits. [The ins and outs of claiming Social Security for women are complex and a topic for a future blog post.]

The ongoing shift among employers from guaranteed pension plans to 401(k)s can work in women’s favor, since they give women control of their own retirement. This is a change from a past in which employers or husbands controlled their financial well-being.

Women were at a distinct disadvantage under traditional pensions because it was difficult for them to accrue the years required to qualify. Working women, who have shorter average tenures than men at each of their jobs, are able to take their 401(k)s with them. But we have not taken full advantage of this. Women with small balances in their defined-contribution plans expose themselves to multiple risks.

Despite the shift to defined-contribution plans, many married women remain reliant on their husbands, and his commitment to the marriage can be critical to a wife’s financial security. One 2003 study found that a substantial minority of men elect to receive higher retirement payments stemming from their employer’s defined-benefit pension plan, sacrificing all survivor benefits for their wives when they die.

Even if men do elect a smaller pension check to ensure that their wives will be taken care of when they’re gone, defined benefit plans are not necessarily indexed to inflation. The longer the wife lives, the less she can buy with her husband’s pension.

In the end, each woman’s retirement security will come down to her individual situation. What is clear is that women have plenty of minefields to negotiate along their path to retirement.