4 Steps Women Can Take to Improve Retirement Readiness

The data are sobering about women's retirement preparedness, but being pre-emptive can help stave off a shortfall

Christine Benz 10 March, 2020 | 1:15AM
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This article is part of our Women in Investing special report.

Among researchers, there’s an active debate about whether there’s a retirement crisis in North America. Despite sobering statistics about average retirement plan balances, researchers point to high levels of government income replacement for lower-income workers as evidence that undersaved workers won’t run out of money during retirement.

Yet one aspect of retirement preparedeness is a settled matter: Women are in worse shape than men on nearly every important metric.

The reasons are manifold, but a few factors loom large. Women have lower lifetime earnings than their male counterparts, due to both wage inequality and the fact that women are more likely to stop working or maintain a reduced schedule to devote time to caregiving for children, elderly parents, or both. Lower lifetime earnings translate into fewer opportunities to fund retirement accounts.

There’s no easy fix for the problem, but women should consider the following steps to help stave off a shortfall.

Maximize contributions before, during, and after work disruptions
Much of the gender gap in lifetime earnings, and in turn retirement savings, owes to women reducing their paid work schedules or quitting work altogether to devote time to unpaid caregiving for children or elderly parents. Women are much more likely than men to cut back on paid work or quit altogether to shoulder caregiving responsibilities for children or other family members.

Those life decisions are about more than money, and women don’t always have complete control over their employers or when their caregiving responsibilities will begin or end. But to the extent that it is possible, women who anticipate that their work trajectories could be affected by caregiving should prioritize employers with family-friendly policies such as paid parental leave and flexible work hours. As roughly 60% of family caregivers are employed, companies are recognizing the importance of policies that support them. The number of companies offering paid family leave has increased substantially in recent years.

The data also show that women’s earnings tend to peak earlier than men’s, no doubt in part because of caregiving responsibilities for many. That accentuates the merits for women of maximizing contributions in the early years of employment, when they can best benefit from compounding, and taking maximum advantage of retirement savings opportunities in those early-to-peak earnings years.

Married women who aren’t earning a salary can contribute to an RRSP provided their spouse has enough earned income to cover the contribution, or they have accumulated contribution room. Doing so can help minimize the retirement-savings shortfall that can accompany work interruptions/reductions.

Get off the sidelines
Research on women’s investing behaviors is all over the map: Studies have pointed to women investing more conservatively than men, trading lessbeing more patient, or being more goals-oriented. Other research indicates that once you control for income, women’s investing behaviors are very similar to men’s.

A few findings are consistent, though. One is that women tend to be more reticent than men to get their money invested. As Sallie Krawcheck, CEO and co-founder of the Ellevest investing service for women, put it, “Our rival is really cash. You know, that's our biggest competition. It's cash and inertia.” That tendency, combined with the fact that women live longer than men, on average, contributes to the likelihood that women will have a shortfall in retirement.

Additionally, women in employer-sponsored plans appear more likely to seek out help in the form of professional management; they use target-date funds and managed-account solutions more than their male counterparts, for example.

Automating investments into an age- and situation-appropriate investment mix such as a target-date fund helps address both tendencies. While many investors take advantage of automatic investments through their company retirement plans, investments into RRSPs and taxable accounts can be readily automated, too. Using a multi-asset product like a target-date fund takes the guesswork out of how to invest the funds.

Work longer
Many factors affect how long we’ll work--lifestyle and health considerations, as well as being able to stay employed and caregiving obligations. The fact that our retirement dates may be out of our control is why Morningstar contributor Mark Miller has referred to working longer as “a worthy aspiration, not a retirement plan.” And research from Morningstar Investment Management head of retirement research David Blanchett indicates that retirees who expect to work longer--past the traditional retirement age of 65, for example--are often unable to do so. Our retirement dates are less in our control than we might like to believe.

That said, the financial (and possibly other) benefits of working longer are undeniable: Additional retirement-plan contributions, delayed portfolio withdrawals, a shorter drawdown period, and delayed Social Security can all help bolster the viability of a retirement plan. The benefits of delaying retirement are especially great for women, in that interrupted work trajectories (for caregiving, see above) and longer life expectancies compound the stresses placed on retirement assets. For women hurtling toward retirement shortfalls, delaying retirement will be the single-most financially impactful decision they can make. That argues for maintaining work skills through investments in continuing education, being mindful of the incidence of ageism and staying alert to combat it, and making investments in physical health.

It’s also worth noting that “working longer” doesn’t necessarily mean sticking it out in a job that makes you miserable. If you can tick a couple of the working longer benefits outlined above--for example, delaying Old Age Security and portfolio withdrawals even if you aren’t earning enough to make additional retirement plan contributions--that can still be incredibly impactful for your plan.

Lay a plan for healthcare costs
Because of their longer life expectancies, women have higher lifetime healthcare outlays than men and a greater need for paid long-term care. Women are often the caregivers for their spouses; when their spouses predecease them, they require paid long-term care at a greater rate. 

That accentuates the virtue of maximizing retirement savings, of course, but women can take additional steps to ensure that high healthcare and long-term-care costs don’t imperil the sustainability of their retirement plans. In addition, greater long-term-care usage suggests that women should be especially thoughtful about developing a long-term-care plan. 

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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