Tuesday, May 2, 2017

Income Insights: Gender Retirement Gap

Some excerpts from the “Income Insights: Gender Retirement Gap” a report by Teachers Insurance and Annuity Association of America-College Retirement Equities Fund October 2016

A cursory view of the US retirement system may appear to be gender neutral; however, after carefully reviewing the data, the Gender Retirement Gap and the significant barriers women face is clear.  In order for the two recent college graduates to have the same amount of money saved for retirement, the man would need to save 10% of his salary while the woman would need to save 18%. Generally speaking, women work for fewer years and receive fewer salary increases among other issues.

Throughout their careers, when both men and women are supposed to be saving for retirement, women face greater challenges than men.
1. Women work fewer years over the course of their lives.
2. When they do work, women earn less compensation than men.
3. Women take on less investment risk, which results in lower investment returns.

Many retirement strategies assume workers will be in the workforce for 40 years. The data demonstrates that neither men nor women tend to work that many years. Frequently, women take time off to have children and then do so again later in life to care to for elder parents. These career breaks add up, resulting in women spending significantly fewer years in the workforce.

As the table below highlights, while men work an average of 38 years, women only average 29 years. This nine-year shortfall means that women work 75% of the years that men work. This fact alone makes it immediately obvious that women need to save a higher percentage of their salary while they are working.

The past decade has marked an important shift in American culture. The number of women opting to leave the workforce to care for their children is on the rise. According to the Pew Research Center, at the turn of the century there were 23% stay-at-home mothers (SAHM).

Today the number is nearly 30%. The largest share of SAHM are married women with working husbands. This may seem surprising given the increase in educational achievement over that period. In 1970 only 7% of SAHM were college graduates, compared to 25% today.

According to the US Census Bureau, in the general population women still only earn 78 cents on the dollar relative to men. Women classified as professionals are even worse off. Professional women earned $996 per week in 2015, compared to professional men who earned $1,383, or, stated another way, 72 cents on the dollar.

Women can be much more risk averse than men and therefore invest somewhat differently. They trade and rebalance their portfolios less often, seek to protect the assets they have, and are much less likely to endure risk in hopes of generating higher returns. One of the keys to long-term investment success is the ability to take well-chosen risks, notably equity risk, the principal source of long-term investment returns. In this regard, women are not particularly effective investors.

Unlike other expenses throughout the course of their lives, the hurdles women face in retirement are not easily managed. Financing retirement needs is distinctly different for women
1. Women live longer.
2. Women spend more money on healthcare.

Examining the Social Security data closely, we discover that after a couple reaches the age of 65 about 1/³ of the men will outlive their wives whereas ²/³ of the women will outlive their husbands. The surprise in the findings is that after losing a spouse the surviving spouse will live another decade.

It is easy to think that the only reason women spend more money on healthcare is because they live longer. The data suggests there is more to the story. According to the Department of Health and Human Services from the age of 65 forward men will spend $18,251 on healthcare whereas women will spend $19,558. This 7% additional spending on healthcare can be attributed to women being more likely to have periods where they suffer through a chronic illness and, as the previous section highlights, they are much less likely to benefit from a spouse-caretaker. They also forecast that healthcare expenses will rise at a rate of 5.8% per year between 2015 and 2025, a growth rate that will impact the financial security of many women.

The economics of retirement for women is starkly different than for men. Women work fewer years, at lower levels of compensation and earn lower returns with their savings. These factors combine to create a resource constraint for women in their golden years. In spite of the fact that women will have fewer economic resources at their disposal, they will incur higher expenses during the retirement phase of their lives, the most prominent one being healthcare.

Despite these odds, countless women successfully prepare for retirement and earn financial security. There are many possible strategies that could lead every woman down the path to success. Below are three noteworthy solutions that are easy to implement. Simple solutions include:
A.  Supplemental savings; even beyond tax deferred amounts
Many women hesitate to save more than the “maximum” amount the government allows taxpayers to put aside for retirement. Trusted advisors might very well encourage women to save more than the maximum. Given lengthening longevity and our increasing desire to have quality time in retirement, putting aside supplemental savings will almost always benefit women in the long run.

B.   Higher levels of risk with savings; marginal equity exposure
Women should consider allocating some portion to higher risk savings. By taking more risk and investing in higher returning assets such as: large cap stocks, international stocks, and real estate, women have the potential to improve the performance of their investment portfolios, resulting in higher levels of lifetime income.
C.   Higher level of guaranteed lifetime income
Many financial advisors suggest obtaining guaranteed lifetime income to cover essential expenses in retirement. These principally include; healthcare, housing, clothing, food and shelter. Just as relying on the average number of years worked can be misleading for women, relying on the average expenses in retirement does not account for the additional economic burden women bear in retirement. Women will both live longer and have higher expenses in retirement.
Women should consider opting for a higher level of guaranteed income recognising that their healthcare expenses are 11% higher and that they are likely to be the sole providers of their household for over a decade. Whenever possible, women should strive to obtain guaranteed lifetime income through their company’s retirement plan.
Even though women have longer life expectancies, the Supreme Court held that when companies offer lifetime income through their retirement plans they must use unisex life expectancy tables. The net result is that men and women of the same age with the same savings will receive the same dollar amount each month by opting into a lifetime income plan offered through their company.

All women, especially those with fewer resources at their disposal, should take advantage of the unisex actuarial tables available through their companies and protect themselves from outliving their assets. Women who decide they want lifetime income outside of their company’s retirement plan will quickly discover that without the benefit of the Supreme Court decision, they will receive a smaller monthly paycheck. This marks a unique opportunity for women to experience an economic advantage in the workplace based on gender. 

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