How Women Can Close the Retirement Gap

Last Updated Jul 30, 2010 12:22 PM EDT

The 10th anniversary edition of Prudential's Financial Experience & Behaviors Among Women finds that many women still lack confidence in their ability to make sound financial decisions, and lack knowledge about sophisticated financial products. Fewer than two in 10 women feel "very prepared" to make wise financial decisions. Half indicate that they "need some help," and one-third feels they "need a lot of help."

It also finds that the economic crisis has heightened women's recognition of the need to develop a financial plan that will meet long-term financial goals. The study can be found here.

The reality is that women as a group typically accumulate lower retirement savings and pension benefits versus men.

One explanation for this is that women are paid less than their male counter parts; therefore they cannot afford to save as much. The widely debated and documented "wage gap" indicates that the median earnings for men is about $10,000 more than for women.

Another explanation is that many women make choices to provide care for their children and/or aging family members. In doing so, this has a significant impact on their career earnings and accumulated retirement benefits. Anyone who is trying to manage a career and care-giving can tell you that it is a juggling act. The trade off is often lower pay and less saved for retirement.

So what can women workers do to address their retirement savings gap? There are several strategies that can help.

Save More and Always:
Women simply need to save more than men. With all other things being equal - the big variable is women have a longer life expectancy in retirement. For example, if a man and women were each targeting to have an income in retirement of $5,000 per month, and the woman was expected to live five years longer, then she would need to have saved $100,000 more by the beginning of her retirement. On average, this can translate to an additional savings requirement of two to three percentage points more for women versus men. It is important to run the numbers and estimate how much you need to save to accumulate the amount of assets and income needed in retirement.

Consider Spousal IRA
A common challenge for women who leave a career is that they do not have earnings and therefore do not participate in an employer provided retirement program such as a 401(k) plan. As long as their working spouse is earning an income, the non-earning spouse should consider opening and contributing to a Spousal IRA, where their income earning spouses can contribute up to $5,000 per year ($6,000 if 50 or older). Spousal IRAs allow non-earning spouses to continue to accumulate retirement savings in their own retirement accounts, which provides additional individual retirement security in the event of divorce.

Seek Employment with Retirement Benefits:
When seeking employment, look for companies that offer paid-parental leave programs and good retirement savings programs. This combination of benefits can help reduce the impact on retirement savings when taking extended leave. Look for employers who offer retirement plans that include employer matching contributions.

Take Inventory of Retirement Benefits
Married women need to know the sources of their retirement income. They also need to how much income they will have in the event that their spouse passes away before them. Take an inventory of all retirement accounts and sources of income such as pensions and Social Security. Also, verify that you are the beneficiary of all retirement accounts and life insurance policies. Mistakes in this area can unintentionally include children and reduce the amounts left to the spouse.

It's also important to know the critical differences in retirement income paid to a surviving spouse. Depending on the payout options selected at retirement, current monthly pension payments when both spouses are alive can be reduced by one third or half upon the death of the pensioner spouse. Also, in respect to Social Security, surviving spouses will generally receive the greater of the survivors benefit, or the benefit based on their own earnings history, but not both.

Manage and Monitor Your Investments:
Women need to take an active role in their own financial planning process. This includes monitoring cash flow and keeping track of where and how retirement accounts are invested. Even if one spouse takes the lead in this process, it's important for both to be involved.

One way to become more a more knowledgeable and confident manager of your money is to start or join an investment club. Apparantly this advice is catching on. The number of women-only investment clubs has grown.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.