Why 401(k) Plans Aren’t Enough to Prepare Women for Retirement

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Why 401(k) Plans Aren’t Enough to Prepare Women for Retirement

Contributing to a 401(k) has become the primary way most of us save for retirement, and perhaps the most important rule of thumb in finance has become “max out your 401(k) funding!”

But these plans, on their own, are woefully inadequate for financially sustaining retirees throughout their lifetime. Worse yet, they’re especially insufficient for women. We’re sorry to say it, but the conventional notion that a 401(k) plan will set up women for retirement success is a myth.

401(k) Plans, By the Numbers

When we say that 401(k) plans are inadequate, we’re not kidding. Women are 80 percent more likely than men to be impoverished at age 65 and older, and three times more likely to be living in poverty between the ages of 75 and 79.

And while common sense tells us we should counteract this by simply contributing more to our retirement accounts, well, we already are.

A recent Vanguard study found that women are 14 percent more likely to voluntarily participate in a 401(k) plan. We also save more than our male co-workers (7 to 16 percent, depending on the income level), yet still end up with significantly less in our retirement because we earn less than men. While the average male employee enjoys a 401(k) balance of $123,262, the average female employee has only $79,572.

According to Vanguard, the gap in retirement savings essentially disappears after controlling for the income gap, but unfortunately, that won’t happen anytime soon. Experts say we likely won’t see wage equality until at least 2059.

Why Women Are More Vulnerable to Financial Hardship in Retirement

Even if we did live in a perfect world, where we receive equal pay, there are a host of other reasons why women are still more vulnerable to financial hardship in retirement.

  1. Most obviously, we live longer. Life expectancy for women is currently approximately 81 years, compared to 76 years for men. That means we not only have to afford the cost of living for a longer period of time but are also burdened with much higher health care expenses, which increase with age. And because health care costs show no signs of slowing down, younger women will have an even steeper hurdle to jump.
  2. A more insidious factor endangering women’s retirement is our tendency to take on caregiving responsibilities for our families. Women make up two-thirds of all caregivers, and while some are able to balance this responsibility with maintaining their day jobs, they are often forced to take time out of the workforce. Women who quit their jobs to care for children or elderly family members lose an average of $324,000 in wages and benefits over their lifetime. Even if they decide to work part-time instead, they don’t do their retirement savings any favors — part-time employees are rarely eligible to participate in a 401(k) plan.

Even if women do “play by the rules” and diligently contribute to their 401(k) plans, the likelihood they’ll enjoy a worry-free and comfortable retirement remains slim.

Our Advice to You

While it’s easy to view women’s retirement years in bleak terms, there are some small steps we can take today that will change our outcomes for the better. 

Spend some time really visualizing what you expect retirement to look like. Where will you be living? How might your lifestyle change? What will a typical day look like? Answering these questions will inform what exactly you’re saving for — and perhaps it will motivate you to increase your contributions to achieve your goals.

Invest in a reality check. Work with a financial advisor to crunch the numbers to see if you are on track. Armed with your financial data and some well-considered assumptions, you can get a realistic idea of where you stand now and devise a plan to make the course-corrections that work best for you.

If you have access to a 401(k) plan, you should absolutely contribute, at least enough to equal your employer’s matching contributions. But it’s never too soon to start supplementing your savings with a health savings account (HSA), a traditional IRA, or a Roth IRA. If you’re self-employed, consider supplementing with a SEP IRA.

Consider obtaining long-term care insurance, especially if you have a family history that indicates you may experience health challenges later in life. Such policies can be costly, yes, but they can make a world of difference.

Want to learn more about retirement planning? Reach out to The Humphreys Group team today.