Photo: Jill Krasny
Do today’s young female professionals face the same retirement-savings burdens as their mothers? They have more income potential and flexibility—don’t they?It’s an important question to resolve, both on an individual basis and as a societal challenge. While the 79 million-strong boomer population undoubtedly requires retirement income advice pronto, there are another 70 million Americans right behind them: Generation X. And they should already be well on their way toward saving and investing.
[See Where to Invest in 2012.]
Gen-Xers were born between 1965 and 1976; some researchers consider those born between 1977 and the end of 1981 a subset called “Young Gen-Xers.”
Many of their investing issues cut across the sexes, but women face unique challenges.
Although scarred by the recession, credit crisis, and ensuing bear market (which is now apparently stabilizing), most professional women in their 30s and 40s are increasingly proactive when it comes to their finances, at least according to select research and anecdotal evidence (consider the rise of female-specific personal-finance television programming and blogging, for instance.)
Unlike most of their mothers, Gen X daughters are competing directly with men for more of the same jobs. The higher-education disparity between the genders has narrowed, and women are becoming savvier consumers when it comes to their own portfolios.
But is that enough to effectively and quickly close a gender investment gap that the Equal Rights Amendment-era generation helped shrink?
Earnings divide. Gen X women do face an uphill climb. That’s primarily due to a lingering, though narrowing, earnings divide. In 2010, women across the broad labour force earned roughly 80 cents for each dollar that men earned, according to the U.S. Bureau of labour Statistics. Even in professions like nursing and personal-care services, which have traditionally attracted more women than men, women still earn only about 83 to 87 per cent of what men earn.
Similar patterns remain true even in higher-level positions such as management, or higher-paid jobs such as surgeons, according to labour
Department data. Women tend to make salaries more comparable to men in areas where “knowledge and research” are a primary industry (college towns, for instance, over manufacturing bases).
Other statistics show a gender difference in job-related investment. A recent survey by the Transamerica centre for Retirement Studies reveals that 70 per cent of women polled have access to a workplace retirement plan, compared with 79 per cent of the men. The gap exists because more women than men tend to hold positions below full-time status, often opting for flexible schedules to take care of children or other family members.
Even when women are taking advantage of workplace or outside retirement plans, the median account balance for women is about 64 per cent that of men, says The Vanguard Group.
The Insured Retirement Institute says its recent data collection still shows some deficiencies among Gen X women in a full understanding of their retirement situation. One-third of female Gen X-ers (married and unmarried, combined) were uncertain about the amount of money they had saved for retirement. Past IRI research shows that women are very highly involved in the management of household finances. This is an indication that greater attention needs to be paid to retirement savings, the group says.
Pensions are past. Gen X-ers will also need to rely more on investment acumen than Americans in earlier generations, the IRI suggests. According to the Employee Benefit Research Institute (EBRI), only 15 per cent of today’s workers are covered by a defined benefit plan. Additionally, IRI research shows that 56 per cent of Gen X-ers expect their 401(k) plans to provide a major source of retirement income, thereby requiring investment expertise to make the plan’s value stretch over more than two decades of retirement. Special attention must also be paid to Gen X-ers who are not married and those considered “middle-income” to address their financial needs for retirement. These groups tend to have less money saved for retirement, and are the most likely to have used their savings for present needs, the IRI says.
Although it’s a common assumption that women lag men when it comes to planning for retirement, women actually seem to be doing all the right things in retirement saving and investing, says Amy Cribbs, principal with Vanguard Participant Experience, the firm’s institutional investment advisory arm.
When eligible, women are slightly more likely than men to join their company’s retirement plan, and much more likely to join at certain income brackets. Women’s average deferral rates are higher than men’s in every income bracket, but especially in the higher brackets. Their average asset allocation is very similar to that of men. And, on average, they don’t take any more loans than men do, Vanguard data show.
Cribbs advises retirement plan administrators to court women with automatic enrollment, automatic deferral increases, and a balanced default fund to build early confidence in their investing abilities.
Despite all this, women as a whole have far fewer retirement dollars. The fact that women also tend to live longer than men further compounds the challenge—lower savings means many women must do more with less over a longer time span. Women also remain more likely to be single parents.
On an individual basis, there’s plenty that women can do now to set themselves up for a more comfortable retirement, even on par with their male contemporaries.
Should women invest more aggressively? Not necessarily. A balanced approach typically fits both sexes. A longer average female lifespan may make products like target-date funds, which change their risk balance over time, appealing to some investors. But women tend to be more conservative investors when it comes to stocks and bonds overall than men, research shows. That means women may not be aggressive enough early on, when investors can typically ride out market swings.
It’s OK to think of yourself first. At least when it comes to retirement savings. College savings is important, of course. But there are options like financial aid and scholarships, plus specifically designed tax-free 529 savings plans. Consider that you’re not necessarily being a good parent if you exhaust your assets and have to hit up your adult children for assistance. No one is suggesting that women deny children a comfortable lifestyle, but mothers tend to turn any windfall into family money.
Instead, women might think about rolling over bonuses or pay increases into their own retirement savings; automatic deposits may be the way to go.
Your biggest asset is…you. One of the biggest assets young professional women (men too, of course) have in their favour is the fact that they have several more years of income potential. Work-life balance is a constant juggle, but thinking about ways to keep pace with earnings increases (continuing education, consulting on a part-time basis to stay fresh if you step out of the workforce) is a vital part of planning. Disability insurance may make sense should you unexpectedly exit the workforce.
Job hopping. Job changes often lead to higher income potential, but there can be collateral damage. The jumper forgets about an existing 401(k) or feels the urge to cash in an existing plan even if it means paying a penalty. According to Hewitt Associates, 49 per cent of workers in their 30s cash out of 401(k) plans upon leaving a job. Women who enter and exit the workforce because of family considerations must keep tabs on retirement funds through former employers. Not sure of your next move? Roll over the 401(k) into an IRA, which you can then invest any way you want. Timing is key, too. Mothers (if they’re a family’s choice for child care) might be more likely to leave a job before vesting, or being eligible for full benefits, kicks in.
Job flexibility shouldn’t mean lax investment. Contract work fits some women’s lifestyles, but as CEO of yourself, you need to think about retirement. According to the labour Department’s Employee Benefits Security Administration, anyone receiving compensation or married to someone receiving compensation can contribute to an IRA. In addition, if you are self-employed, you can start a Simplified Employment Plan (SEP) or a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE). As with other retirement savings plans, there may be tax consequences, and possibly penalties, if you withdraw your savings early.
Plan for healthcare expenses, too. Women have significantly higher lifetime healthcare expenditures than men, mainly because of their average longevity. Long-term-care costs also fall disproportionately on women because they are more likely to provide care for men and outlive them.
Ask for help. Women certainly aren’t financially illiterate, but they should still get professional help. There’s no shame in leaning on a financial planner—male or female.