Retirement insecurity runs high among the baby boomer generation, but female boomers in particular feel less prepared for their golden years.
While women continue to be a growing and thriving part of the workforce, a recent survey by Charles Schwab found that only 36% of women believe they’ll have enough money for a comfortable retirement.
Historically lower wages and time out of the workplace to raise their family, can mean that women--who generally live longer than men--have saved less for their retirement and will receive lower Social Security income. Analysis of U.S. Census data by Wilder Opportunities for Women showed that 42% of all women lack financial security and three out of five women over 65 cannot afford to cover their basic needs.
To better understand the unique retirement challenges women face, I spoke with Kelly Livers, regional branch executive and national chairperson for the Women’s Interactive Network at Charles Schwab. She encourages women take a more active role in financial planning, especially when it comes to retirement. Here’s what she had to say:
Boomer: Even though women have made progress in the area of earnings power, they still have a ways to go before shrinking the male and female retirement gap, why?
Livers: Women have seen a lot of improvements in the last several years: Their earning power is increasing; they’re receiving more bachelor’s degrees, master’s degrees, and doctorate degrees than men; and their overall employment rate is at an all-time high. In fact, the Labor Department reported that as of September 2013, female workers had recovered all of their jobs lost during the recession and then some, speeding ahead of men who have yet to make a full comeback. In 2010, women became accountable for 50% of private wealth in the United States.
Despite all of this improvement, the average woman still earns a lower salary than her male counterpart. Data released this past October by the Labor Department shows that full-time working women aged 55 and older earned just three-quarters of the income of men in the same age group in 2012. This significant difference in earnings has a major impact on how much women are able to save, leaving them with a smaller nest egg for retirement than men.
On top of lower earnings, women spend more time out of the workforce due to caregiving for children and elderly relatives, adding up to an average of 12 fewer years in the workforce than men. This translates into 12 less years of savings, which has a dramatic impact on their investments’ ability to compound.
Boomer: What are the reasons baby boomer women will have a more expensive retirement?
Livers: According to the Department of Health and Human Services, women tend to outlive men by an average of six years. This may seem like a good thing for women, but it also means increased medical expenses and a higher likelihood of entering a nursing home or assisted living community, which can cost tens of thousands of dollars a year.
To prepare financially for a more expensive retirement, it’s important to think about keeping a certain proportion of your investment portfolio invested in equities even after you retire. Everyone’s risk profile and circumstances are different, but we generally advise our clients to keep about 60% of their investments in stocks and 40% in bonds and cash equivalents, after setting aside a cash cushion to last one year. As you continue through retirement, gradually reduce your exposure to equities, but avoid dipping below 20%. This combination will help protect you against market volatility as you continue to benefit from compound growth.
To supplement Medicare, women should also consider signing up for long-term care insurance. Policies cost less if purchased when you're younger and in good health, so consider buying in your early- to mid-50s.
Boomer: Why do baby boomer women and men have such a large gap in retirement savings?
Livers: While the combined effects of lower earnings and fewer years in the workforce make it very difficult for women to save as much money as men, we also need to find ways to improve women’s financial literacy. After working in the financial services industry for more than two decades, I’ve seen firsthand how women are too often excluded from conversations with financial advisors, which results in a lack of knowledge about the savings tools and strategies available. For example, men outnumber women 2 to 1 for having an individual retirement account. Education and inclusion are the keys to solving this problem.
Boomer: How does child rearing impact Social Security benefits, and why is it important for boomer women to understand this?
Livers: A person’s Social Security benefits are determined by their average indexed monthly earnings (AIME) during their 35 highest-earning years after age 21. If you worked fewer than 35 years, the missing years are counted as 0, which can bring your average down significantly. This system can really put women at a disadvantage if they choose to take time out of the workforce to raise their children. Time out of the workforce combined with lower earnings explains why in 2012, the SSA reported that women earned about 20% less in Social Security than men.
Understanding this upfront will help you better prepare for the limited role Social Security may play in your retirement income strategy. To maximize what you will receive, consider delaying Social Security withdraws. Benefits increase by 8% for each year you wait to collect between your normal retirement age and age 70. That's an extraordinary risk-free return in this interest rate environment.
Boomer: Do you think the increasing number of “grey divorces” are tougher on men or women?
Livers: Mentally and physically, divorce is hard on anyone. Even from a money perspective, it tends to end up meaning a decrease in discretionary spending for both the husband and wife. In fact, the University of Virginia did a study in 2011 and found that 38% of couples considering divorce before the recession decided to put it off, most likely because of the high cost of maintaining two separate households.
Still, a lifetime of lower earnings and the resulting lower Social Security benefits mean that many women plan to rely on their husbands for financial support during retirement. Because of this, getting divorced later in life can often have an even bigger financial impact on women. Boomer women are also less likely to have been the financial decision-maker for their household, so a grey divorce may mean that they will be managing their own finances for the first time in decades. As recently divorced women evaluate their new financial situation, it’s important to remember that they can still collect Social Security benefits on their ex’s record as long as they were married for at least 10 years.