Do Women Need To Save More Than Men for Retirement?

I have been thrilled to read recent reports that millennials are out-saving other generations. On average, we save 19% of our income, which is 5% more than Gen Xers and Baby Boomers, who average only 14%.

Many of us are focusing our saving on near-term objectives, like housing, or to live a certain lifestyle. It is equally important that we save for retirement. Investing small amounts regularly can build tremendous wealth, due to the amazing power of compound interest. But, does your gender matter in your retirement planning?

I’m disappointed to say it does, because the data suggests women need to save more than men. We face a retirement gender gap. The first reason is a positive one; women tend to live longer. This is the case without a single exception, in all countries. Because of this difference, we need more money to sustain our longer lives.

The other reasons contributing to the retirement gap are frustrating. Women face a persistent wage gap over the length of our careers and spend more time out of the workforce than men. On average, we need to save $1.25 for every $1 saved by men.

A recent article in the Journal of Accountancy addressed this topic and highlighted the health care penalty that women face;

“With longer lives, women also have more years of healthcare to pay for. According to HealthView Services, a company that publishes healthcare cost research for financial advisers, a healthy 55-year old woman can expect to spend $79,000 more on healthcare in retirement than a man of the same age. And women are much more likely to need long-term care, too...It's no coincidence that over 70% of the residents in nursing homes are women.”

The article also noted that, in heterosexual couples, "Statistically, men tend to go first, and it's their wives who had to take care of them.”

The retirement gap that exists between men and women may be frustrating, but it is important to understand now, in our working years, so we can take action. Here are some practical steps that you can take to address your personal retirement gap:

  • Redirect money from lower-importance categories. Look out for the sneaky ways we spend more than we mean to. These small expenses can add up; reducing them creates wiggle room for more saving.

  • Increase your retirement saving. If you have a 401(k) at work, you can invest up to $18,000 tax-free. Your employer may match a portion of that, which is like free money.

  • Start talking more frequently about money with the women in your life, because knowledge is power. A Fidelity study found that 92% of women want to learn more about financial planning, but eight in 10 “...confess they have refrained at some point from talking about their finances with those they are close to.” Women report that talking about money is “too personal.”

  • Encourage other women to save for retirement. Be the woman at work that encourages HR to host retirement savings webinars with your 401(k) provider, and talks openly about how excited you are to increase your 401(k) contributions. Your positive, non-judgemental approach will inspire others.

  • Grow your income. This may not happen overnight, but it is the surest path to close your personal retirement and wage gap. At a minimum, you should ensure HR has verified that there is no wage gap between you and your male peers. But I know you can do even more than that to build your wealth.

While data tell us we need to save more than men, I’m hopeful that our generation will be able to apply our tendency to save towards retirement investing. I’ve never met a retiree that regretted saving too much for their future. Let’s start building wealth now, so we can live our Golden Girls life in style, just like Blanche, Dorothy, Sophia, and Rose.

xoxo,

Ms. Financier

What’s the Difference Between an IRA and 401(k)? Why Does it Matter?

Saving for retirement can be daunting...and the finance industry’s love for confusing acronyms doesn’t help. So, what’s the difference between an IRA and a 401(k)? And, do those differences even matter? Let’s explore the basics, to prepare you to build wealth.

Why should you care about investing for retirement? Fair question - retirement can seem like a hazy event in the future, making it feel far less urgent than other life priorities. However, let’s learn from our parents - not saving early enough for retirement is the number one financial regret of Baby Boomers in America. In contrast, I have never heard anyone say they regret saving too much for retirement, too early.

Further, investing a modest amount today can be more powerful than investing a larger sum later in life. The power of compound interest means that the earlier you invest, the sooner your investments start growing and making money on your behalf. You can never, ever recapture time. Starting today with smaller amounts will build financial momentum in your investment accounts.

Finally, women should care about investing for retirement because we face a retirement gender gap. We tend to live longer, face a wage gap over the length of our careers, and spend more time out of the workforce than men. On average, we need to save $1.25 for every $1 saved by men.

What type of account is best - an IRA or a 401(k)? Once you’ve decided to invest, it’s time to identify the best type of account for your retirement investing. Let me be clear: either an IRA or a 401(k) is better than doing nothing. Both are fabulous options that are set up to encourage investing. Don’t spend months trying to make the perfect choice; you’ll lose valuable time where your money could be in the market, growing for you.

If you’d like to learn more details about investing, here’s how to start investing in four steps. I’ve also created a very simple summary of what investing in the market really means. Here’s a summary of the main differences between an IRA and 401(k):

Traditional 401(k) Account: Offered by your employer, this account allows you to invest a percentage of your wages for retirement.

  • 401(k) accounts are funded with pre-tax wages. This means you pay less in taxes to the IRS. It also means you’re investing a larger amount of money (since you’re investing a full dollar earned, not just the portion remaining after taxes are paid).

  • Many employers will “match” a portion of your savings. This is free money; never pass up free money!

  • You pay taxes on the money when you withdraw it in retirement.

  • In 2017, you can save up to $18,000 annually in a 401(k) - more if you are over 50.

  • Generally, you cannot access the funds in a 401(k) account without paying steep penalties until you reach retirement.

  • 401(k) is the subsection of the Internal Revenue Code that defines how these accounts work, hence the name of this retirement vehicle.

Traditional Individual Retirement Account (IRA): You have to open this account for yourself at a qualified bank or broker, like Vanguard or Fidelity.

  • Traditional IRAs are funded with wages that you have already paid taxes on. However, depending on your income, you may be able to deduct your contributions from your taxes.

  • You pay taxes on the money when you withdraw it in retirement.

  • In 2017, you can save up to $5,500 annually in an IRA - more if you are over 50. The limit is far lower than 401(k) limits in most cases.

  • Funds in an IRA account are for your retirement, but certain qualifying expenses allow you to skirt tax penalties. These include higher education expenses, a first-time home purchase, and medical costs.

In addition to the differences above, 401(k) and IRA accounts may come in two flavors: Traditional and Roth.

  • Traditional accounts have been funded with money that hasn’t been taxed, so you pay taxes on the money when you access it in retirement. (Traditional IRA investments receive a tax deduction, which makes it the same as a pre-tax 401(k) investment.)

  • Roth accounts are funded with money that has already been taxed, so you do not owe the government any taxes when you access it in retirement.

So, which is the right type of account for you? Like many financial answers, it depends. In general, I recommend prioritizing a 401(k) account, because it often includes both employer matching funds, and you can save far more money for your retirement, in one place.

That said, the best advice I can give you is to make an informed decision quickly, and start investing (or, increasing your investing). Every day that passes without your money in the market is another day that you’re missing out on the amazing power of compound interest.

I’m curious if you have any other questions about the differences between these accounts. Which have you prioritized? Let’s get investing - you’ve got this!

xoxo,

Ms. Financier

This post also appeared on the Fairygodboss blog - I love their mission to improve the lives and workplace for women, through transparency.

Three Reasons Why Financial Freedom Is a Priority For Me

There aren’t many people in my life that know about my goal to retire by 45. While I love to talk about money and personal finance, only a few people know I’m spending most of my money trying to reach financial freedom (the point at which our investments produce enough regular income to cover our expenses). 

That said, when I get brave enough to share, one of the common reactions is incredulity. Some suspect I have a major trust fund (I don’t), or that Mr. Financier and I have inherited wealth (we haven’t); others are curious about the math behind financial independence; and others say, “Retire by 45?! Why would you want to retire so early - what will you DO with yourself!?”  

 The answer to that question is exactly why I’m so focused on financial freedom, so I’d like to share my perspective. I also recognize how lucky I am that my circumstances and hard work have put me in a position to consider leaving the workforce at a relatively early age. Here are three reasons why I’m so focused on this goal.

#1: I Need More Time for Hobbies

There’s a lot that I enjoy...reading, traveling, hiking, bicycling, volunteering, mountaineering, kayaking, discussing personal finance, bird watching, running, weightlifting, yoga, cooking, learning and taking classes, enjoying a nice glass of wine...to name a few.  With my current career, I am left with only two precious days each week - Saturday and Sunday - to focus on my hobbies. Realistically, those days are currently also filled with chores that get neglected during the workweek.

I get more enjoyment from a day that allows me to focus on the things that bring me joy. A day that starts with a morning yoga class, a post-class coffee with local volunteers to strategize about an upcoming campaign, followed by a hike in the woods and picnic lunch with my partner, ending with starting the first several chapters of a huge novel before a delicious home cooked dinner and glass of wine - that’s a dream.

If I’m lucky, I get 4 days like that a month.  If I’m realistic, it’s only 1 - and that’s depressing, to me. The idea that I might be able to escape the daily grind and have more time to spend on the things I enjoy is incredibly motivating, empowering, and liberating.

#2: I’m Sick of Working

I’ve been earning a paycheck in some way, shape, or form since I was 13. Before that, I babysat for neighborhood kids (I even had my own business cards and completed the American Red Cross Babysitting & Child Care Training) and did clerical work or physical labor as needed for my dad’s small business. When I was able to take a job outside the neighborhood at 13, I began earning paychecks. I’ve worked at a daycare center, served as a restaurant hostess, was a cashier at a sporting goods store, interned at a financial planner’s office, served as a lifeguard, and interned at a law firm...all before turning 21.

Since graduating from college, I have worked in consulting. There’s plenty to love about my career; the client challenges are fascinating, I work with smart colleagues, and I get to travel extensively. As most businesspeople know, traveling for work is both a pleasure and a grind; on the whole, I realize that I’m lucky to explore the world as part of my work. However, the massive time commitment and consistent stamina required of at a full-time job in management consulting is something I’d gladly leave behind. At the end of the day - it’s work. It's work I have to do because I need money to live.

#3: I Finally Realized That Experiences > Things

I think of 2011 as the year that the scales fell from my eyes around the value of material goods. I won’t tell you that I have sworn off beautiful things - I still salivate over a gorgeous pair of Louboutins. But, during the financial crisis, I was terrified I’d lose my retirement savings, job, and home. When the economy began to improve, I bounced back in a very financially counterproductive way. I rewarded myself with a lot of things. And those things weren’t necessarily making me feel happier or more secure. I’d often open up my credit card bills and feel nauseous about how much I spent on “stuff.”

That year, I started taking smaller steps to get my financial house in order. I stopped planning shopping afternoons with friends and instead suggested museums or picnic lunches. I canceled my recurring housekeeping service and began cleaning my own home. Mr. Financier and I started reviewing our budgets even more regularly and critically to look for areas where we were leaking money. We re-routed “fun money” that we had previously spent mindlessly towards investments. I got more serious about my career, knowing that if I grew my income, I’d have more to invest. Simultaneously I started exploring the FIRE movement and was very inspired by others that had saved enough to stop full-time work in their 50s, 40s, or earlier!

I began to internalize that, for me, life experiences will always deliver more value than material goods. And I’ve always been a fan of aligning money with your personal values. This series of realizations helped me put my money to work for my future, instead of on things I’d enjoy in the present.

As you can see by these three reasons, the goal of achieving financial freedom is so important to me because time is an incredibly precious asset and given the choice (which I’m grateful to have), I prefer free up time for experiences outside of work. I’m curious if you’ve contemplated financial freedom - either earlier in your 30s or 40s or later in life. If so, what drove you to explore the idea? Let me know your thoughts.

 xoxo, Ms. Financier