Planning for financial security in retirement is crucial for everyone however certain realities put women at a disadvantage years before they reach their golden years.
It starts with the gender pay gap – during their working years, women continue to earn less than men. According to a 2019 PayScale report, the median salary for women was approximately 21% lower than the median salary for men.
This difference in earnings is compounded by another reality – women tend to drop out of the workforce when they become mothers. According to the Bureau of Labor Statistics, approximately 35% of mothers with young children under the age of six leave the workforce to raise their children.
These two factors alone can lower the monthly amount of Social Security benefits a woman receives when she retires. In fact, USA Today reports the average retirement income of women age 65 and older is 25% lower than men the same age.
The good news – when women become aware of the issues that may impact their retirement income they can avoid the top five money mistakes they tend to make.
1. Not Understanding How Social Security Works
Social Security benefits are based on lifetime earnings. The Social Security Administration (SSA) calculates your average indexed monthly earnings during the 35 years in which you earned the most in wages.
For women who earn less than their male counterparts, and for those who leave the workforce to raise children, their calculated Social Security benefit is lower than what average male worker receives.
This reality is reflected in the latest statistics available from the Social Security Administration. In 2017, the average annual Social Security income received by women 65 years and older was $14,353, compared to $18,041 for men the same age.
These statistics may not seem to be a problem for married women with husbands who are eligible for the maximum Social Security benefit allowed. However, women need to understand how the death of their spouse or a divorce may affect their Social Security income in retirement.
The first step is getting a clear picture of your estimated future Social Security benefit. To see your Social Security account statement, visit: www.ssa.gov/myaccount/.
2. Not Doing What It Takes To Lower Credit Card & Loan Debt
Entering retirement strapped with debt will take a huge bite out of the retirement income of men and women alike.
For women likely to enter their golden years unmarried, it’s crucial to calculate how much retirement income they can expect and how much of that income may be eaten up by monthly payments on credit cards and loans.
For married women, it’s important to find out what may happen in regard to loans and credit cards if their spouse predeceases them.
Whether or not a widow is responsible for paying debts incurred during marriage depends on how the accounts were originally set up and on the laws in the state where she lives.
If she is a co-signer on a loan, or a joint account holder on a credit card, she will be responsible for these debts when her spouse passes away.
In community property states, she may be required to use marital assets to pay the debts of her deceased spouse even if she did not sign the original paperwork.
Developing a plan to lower debt in the years leading up to retirement is an important way to lay the groundwork for financial security in the future.
3. Spending Too Much On Gifts For Family Members
As mothers, women want to do what they can to bring happiness to their loved ones. Giving generous gifts to children and grandchildren seem to be worth every penny during your working years.
However, going overboard when spending on gifts can deplete savings and run up credit card debt quicker than many women realize.
When retirement draws near, it’s time to cut back and put a portion of that money toward your future financial security. Your loved ones will continue to love you no matter what.
4. Putting Money Only In Savings Accounts Instead Of Investing
Thanks to the gender pay gap, it’s no surprise putting money aside for retirement is more of a challenge for working women.
However, surveys show that women are more likely to keep whatever they can save in safe, low-interest bank accounts and CDs rather than making investments that can grow their money. This is due to the fact that women are generally more reluctant to take risks than men.
Yet something as simple as maximizing contributions to a company-sponsored 401k can go a long way toward increasing monthly income in retirement. Even better – some companies match employee contributions up to a certain percentage or dollar amount providing another boost to your retirement nest egg.
If you get a sizable tax return and you’re in a good place financially, you may also want to consider investing your refund in a traditional or Roth IRA. As Albert Einstein once said, “Compound interest is the greatest mathematical discovery of all time.”
5. Not Paying Attention To The All Financial Details
It’s far too common to hear about women who were suddenly faced with a divorce or the death of their spouse only to find themselves unprepared to take over managing their finances.
Here’s a basic checklist of ways women can begin to prepare themselves sooner rather than later:
- Know where all financial documents are kept including retirement accounts, investment accounts, property titles and insurance policies.
- Review and update all estate-related documents: Last Will & Testament, Power of Attorney and Healthcare Directives.
- Make sure your name is on all family bank accounts, retirement accounts, investments and property titles to establish your legal right to these assets.
- In addition to joint bank accounts and credit cards, establish at least one bank account and a credit card in your name only.
- To avoid unfortunate surprises, get a clear picture of your total debt (loans and credit cards) and compare it against the total net value of all your cash and property assets.
- Check and update beneficiaries on your spouse’s employee benefits and 401k plans including any that may have been established with previous employers before you married.
- If you receive a cash inheritance or life insurance proceeds from your parent or a relative, do not deposit the funds in joint accounts held with your spouse. If you use inherited money to buy property or other types of assets, put the titles for these assets in your name only.
- Review all life insurance policies to ensure there is adequate coverage if your spouse passes away and look into other types of insurance products that can provide a flow of income in your retirement.
Whether currently married or looking for Mr. Right, as a woman there’s a strong possibility you may be living on your own at some point during your retirement years.
To prevent against costly mistakes, it’s wise to work with a trusted estate attorney and retirement-planning advisor to ensure you’re financially secure in the future.