Mary Quist-Newins, MBA, MSFS, CFP®, ChFC®, CLU®
You’ve probably heard the old adage “failing to plan is planning to fail” more times than you can count. Yet, nowhere is this truth more clearly seen than in the relationship between American women and comprehensive retirement planning.
The majority of American women have good reason to be stressed about their finances, particularly given the additional economic strain caused by the COVID-19 pandemic. However, very few women have developed retirement plans that adequately meet their future income, wealth, and risk management needs.
In this post, we’ll provide examples of risks women disproportionately face in retirement and why it’s so crucial to factor these obstacles into a retirement plan as early as possible. When compared with men, there are five heightened risk areas that most women share.
5 Risks Women Face when Planning for Retirement:
On average, women live five years longer than men, according to the National Center for Health Statistics. (1) A longer life expectancy, partnered with a higher probability of singlehood and disabling illnesses, increases the need for reliable sources of lifetime income.
2. Lower lifetime earnings
While there has been much dispute over the cause of the so-called “pay gap,” there is little dispute as to its effect. Overall, women earn less than men. The Bureau of Labor Statistics (BLS) reports that women in the U.S. generally earn about 82 cents on the dollar when compared to men. (2) In addition, as women on average take 12 years out of their working lives to care for children and/or parents, many have lifetime earnings that are far lower than expected. (3)
As expected, lower earned income results in less retirement savings, pensions, and Social Security Income (SSI) benefits. In addition, women are more likely to depend on SSI as the foundation of retirement income. Women are also far less likely to have accumulated supplemental retirement savings. The average 401(k) account size for women is about $10,000 less than that of their male counterparts according to data from Vanguard (4).
Many women face the financial risk of being solely responsible for personal and household expenses. In their later years, women have more than double the chance men do of being alone. Obviously, the absence of a second income earner/asset owner bears significant financial risks.
Sadly, widowhood significantly increases a woman’s risk of becoming impoverished. Women aged 85 and over are more than twice as likely to be widowed compared to men of the same age. (5)
4. The double jeopardy of long-term care
Women are significantly more likely than men to become both caregivers and receivers, which leaves them doubly exposed to the devastating financial risks of long-term care. As long-term care receivers, they rack up more than twice the average cost for care rendered to men according to The U.S. Department of Health and Human Services. (6) Since many women have fewer financial means and give care before becoming a caregiver, their finances are often exhausted when they need care themselves.
The exorbitant cost associated with long-term care assistance is widely recognized, yet the potentially greater financial toll of caregiving often flies under the radar.
Prior to the pandemic, women represented more than two-thirds of unpaid caregivers. According to a 2011 report by the MetLife Mature Market Institute, the economic costs—between lost wages, reductions in Social Security, and pension benefits—are estimated to be $324,044 for the average female caregiver. (7)
5. Financial illiteracy
Industry and academic studies consistently affirm that financial illiteracy in the U.S. is appallingly widespread and that women lag behind men on virtually every measure.
In 2014, the National Bureau of Economic Research (NBER) found that when asked basic financial literacy questions, women are far less likely than men to answer correctly. (8) Given the direct correlation between financial illiteracy and poverty, it is essential for women to build confidence in their financial literacy and ensure they have a basic foundation of understanding because a lack of knowledge inevitably leads to inaction.
The Retirement Planning Connection
Altogether, these five heightened risk areas underscore the importance of developing a comprehensive retirement plan. Research shows that women seek holistic solutions to their financial needs. Additionally, once a comprehensive plan is in place, women are more likely than men to take necessary action.
Not only do holistic plans inspire women to take some much needed action, they also produce a significant psychological benefit, according to a 2008 study by the Financial Planning Association (FPA) and Ameriprise. (8) Notably, the same FPA/Ameriprise survey showed that more than four in 10 (42 percent) of those with multiple-issue plans said they felt “very/extremely” prepared for retirement. Four in 10 reporting that they are highly prepared for a huge life transition is a major indicator of the importance of comprehensive planning.
Another key point is that the rate of confidence among these respondents was more than double that of women who have an advisor but have not developed a comprehensive plan (20 percent), and roughly three times greater than that of self-directed female respondents (14 percent).
This year, the Coronavirus pandemic has deepened the risk factors women face when planning for retirement. Now more than ever, it is crucial that women create a comprehensive retirement plan. Planning is a crucial key to well-being—now and in the years to come.