It’s still early enough in the year to make a New Year’s resolution to save more for retirement. And several recent studies underscore that women would be wise to increase their savings rate as soon as possible because their retirement nest eggs are significantly smaller than those of their male counterparts. LIMRA, for example, found women’s average defined contribution plan balances were just 60 percent of men’s average balances. And a University of Wisconsin’s survey of state government employees reported that women have only 70 cents in their retirement accounts for each dollar saved by male workers.
Importantly, the University of Wisconsin researchers studied male and female employees of the same age and making the same salary, so the earnings gap between the sexes didn’t figure into the different savings rates. The study also found that women employees were 20 percent less likely than men to contribute the maximum amount to the retirement plan.
Alarmingly, the women responding to the University of Wisconsin survey didn’t realize they were falling behind. This clearly points to the need for women to become more informed and get more disciplined about saving for retirement. So, what do smart women need to do?
- Pay yourself first. Try to save at least 10 percent of your income each year. Start with your workplace retirement plan—and, if your company offers a matching contribution, contribute enough to qualify. If you can, contribute the maximum amount, and, if you are over age 50, make the additional catch-up contribution. Also, carefully consider how much risk you are willing to take in exchange for the potential to earn higher returns. And, most importantly, if you change jobs, rollover your 401(k). Don’t cash it out.
- Squeeze your budget. Try withdrawing from your checking account just two thirds of what you normally spend on groceries and entertainment in a month. When you discover you can make ends meet on that reduced amount, try withdrawing even less. Committing to living on less just two or three months out of the year can help you to become a more mindful consumer and boost your savings.
- Distinguish need from want. Viewing expenses such as vacations or dinners out in relation to the price tag of one of your short-term goals may help you to prioritize your spending. For example, think of the annual amount you spend on magazine subscriptions or morning lattes in terms of a percentage of a short-term goal, say a year of college tuition. Tempted to buy new outfit? Evaluate the cost in terms of how many hours you worked to earn the money. Better yet, calculate what you might earn in ten years, or even thirty years, if you resist eating out once a week and instead invest the money in your retirement plan.
- Live without credit. If you can’t pay cash for it, you can’t afford it. If you need motivation to stay on budget, rely on the power of peer pressure. That is, share your goal of being debt-free with your friends so you’ll be less likely to resort to plastic when you are with them. Also, put your credit cards on ice, literally. If you store your cards in your freezer, you can defrost them in the event of a true emergency.
- Keep good records. It’s helpful to factor in all your potential sources of retirement income. To calculate your Social Security benefit estimate, visit the Social Security Administration’s Web site. You should also keep careful records of your company retirement plan, including statements and distribution rules.
- Stay motivated. On average, a female retiring at age 65 can expect to live another 19 years, three years longer than a man retiring at the same age. Therefore, you need to commit to saving for the long-term.
I understand that women face specific savings challenges. For example, women are more likely to work in part-time jobs that don’t qualify for retirement plans. And, even in 2013, many women still earn less than men for comparable jobs. Finally, women are more likely to interrupt their careers to take care of family members.
However, these challenges are not insurmountable. Women are terrific money managers. For motivation, consider these statistics that show women’s significant involvement in money management and household purchasing decisions. For example, of high net-worth women, 88 percent are moderately or highly involved in the oversight and management of their assets. Further, women control or influence 67 percent of household investment decisions and make 83 percent of overall family purchasing decisions (healthcare, 80 percent; cars, 68percent; vacations, 92 percent; home furnishings 94 percent; and banking services, 89 percent) that are worth an estimated $5 trillion each year, according to a US Trust study.
And women are certainly successful in business. According to the National Association for Women Business Owners, women-owned businesses (50 percent or more) account for 40 percent of all privately held US firms and generated $1.9 trillion in sales in 2008. Amazingly, if US-based women-owned businesses were their own country, they would have the fifth largest GDP in the world.
Above all, as you commit to a more rigorous saving plan, don’t be afraid to ask questions and seek the advice of a trusted advisor.