Taking control of your financial future may be even more important for women than it is for men.  Just because women on average live longer, doesn’t necessarily mean that they come out ahead on retirement dollars.  There are many factors that contribute to women coming up short on their nest eggs in comparison to their male counterparts.  Here’s why women need to invest and save actively.

The earnings gap.

Even today, men tend to earn more than women. A fresh 2008 survey of retirement savings trends conducted by Hewitt Associates, a global human resources consulting firm, found that the women worked they surveyed earned an average of $57,000 annually, compared to $84,000 for men. The average male employee in the study therefore had the chance to defer greater amounts of salary into a company retirement plan, while the average salary of the surveyed female employees sometimes wasn’t high enough to trigger a company match.

Time out of the workplace.

Men don’t usually put their careers aside to care for young children (or family members with special needs). Traditionally, women have been the ones who have taken time out of the work force for these responsibilities.

If a woman relies on a company retirement plan to accumulate retirement savings, this time out from the workplace can amount to a financial setback. A male employee may contribute to a 401(k) plan year after year for 20 or 30 years or more, and his contribution levels may increase as his salary increases. If a woman leaves the workplace for a few years (or more), her retirement nest egg still compounds, but the steady salary deferrals to a 401(k) plan cease. When she retires, she may have less of a nest egg than her male counterpart if she just relies on the company retirement plan as her primary retirement savings vehicle.

This is a compelling reason for women to build their own investment portfolios, in addition to participating in employer-sponsored retirement plans.

What About Divorce?

Divorce may mean that a woman has to “start over” financially. Many women find that a “fair and equal” settlement is not an equitable settlement. When the husband earns much more than the wife, all kinds of decisions ride on the stability of the husband’s salary – the neighborhood the couple or family can afford, what school the kids attend, and so on. When that big salary is gone, the woman faces a reduced lifestyle, and may dip into her savings to maintain financial equilibrium.

More importantly, she may not have the earnings potential her husband has. Things can get particularly tough when the wife is a key employee at a business or professional practice her husband started years before the marriage. After a divorce, the husband may retain the business and the bulk of the business assets, regardless of the integral role the wife played in growing and running the company. Will she want to work alongside her ex-husband? Probably not. So the stable job she had is a memory, and a career change and a move may be next.

This is why divorce financial planning is so important for many women. Women need to walk away from a divorce not just with an “equal” settlement, but with an investment portfolio and a financial plan personalized for their needs and goals, so that they can (re)build wealth on their own.

Women outlive men. On average, women live five years longer than men; in fact, the Labor Department estimates that almost 90% of women will outlive their husbands and spend a portion of their retirements managing their own finances.

A woman who retires alone may face a very long retirement: if you leave work at 62, it may last 20 years or longer, with only about 30% of your income coming from Social Security. (That’s if Social Security is still around.)

The Hewitt Associates study estimated that women’s retirements will average 22 years, compared to 19 years for men. Factoring in projected increases in healthcare costs, it concluded that women need to save 2% more than men annually over 30 years to maintain their standard of living when they retire. If a woman earning $57,000 contributes 4% to her company retirement plan annually over 30 years instead of 2% (that’s $95 more a month), the study estimates that she’ll have an extra $81,000 at her retirement date.

photo credit: LSE Library

This was prepared by Peter Montoya Inc., Securities offered through LPL Financial, Member FINRA/SIPC.

Hopefully, my article title doesn’t start a gender battle of my blog.  Hear me out first.  On average, women work fewer years and earn less than men, but they also tend to live longer.1 Based on these studies, it makes planning for retirement that much more important for women.

Women Don’t Invest Differently…

Unfortunately, some negative stereotypes still exist about a woman’s ability to manage money, which may cause some women to feel they shouldn’t make their own investment choices. Some leave the decision making to their husbands, which can result in their being ill-equipped to handle their finances if they outlive their spouses.

Despite the stereotypes, studies show that the majority of married women actively participate or take the leading role in managing family finances. Moreover, women outnumber men in participation in investment clubs across America.  I was able to visit my first investment club last week and was pleasantly surprised on how the women were current on the market’s happenings.

Educating themselves about investments and long-term planning can help women feel more comfortable with riskier yet potentially more rewarding  investments. As more women enter the field of financial advising and planning, female investors may also be more inclined to seek advice from other women.

…But There Are Real Obstacles to Overcome

Women earn only about 80 cents for every dollar earned by men.1 Because they earn less, women often are unable to invest as much as men. However, in order to make up for other discrepancies in retirement benefits, women may actually need to invest more.

For example, because women often leave work to bring up children or care for elderly relatives, they have fewer total working years. On average, they spend seven years out of the workforce to care for family members.

This may mean that women qualify for lower pension benefits. Fewer years in the workforce, fewer years with a single employer, and lower pay are all factors that may contribute to a lower average pension for female retirees. At the same time, women on average live longer than men. That means they must provide for more years in retirement than their male counterparts.

As a result of some of these factors, women may also receive lower Social Security benefits than men. Social Security benefits are calculated based on a person’s highest 35 years of earnings. If a benefit recipient doesn’t have 35 years in the workforce, the Social Security Administration will add zero-earnings years to his or her record to equal 35 years. This will lower the average monthly earnings figure and may result in lower benefits for women who have not worked for a total of 35 years.

Working Toward a Solution

While there is clearly a gender gap in earnings, data from the Bureau of Labor Statistics has shown improvements in women’s earnings. Higher earnings for women could mean the potential for more investments.

Nonetheless, the bottom line is that in order to make up for differences in earnings and benefits, and more retirement years due to longer life spans, women may have to invest more.

1Sources: Bureau of Labor Statistics, September 2004; U.S. General Accounting Office, October 2003 (most current data available).

2Sources: On Wall Street, February 2005; National Association of Investors Corporation, August 2004.

This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.

Q: We are expecting our first child in six months and are wondering if we can afford for my wife to quit work and be a stay at home mom.  Can you help us think through this decision?

A: You are wise to be considering the financial ramifications of this change.  Failure to do so could create huge debt and huge problems for you.   Here’s what you need to do:

1. Prepare a Working Budget

The first thing you will need to do is prepare a working budget with life as it is today.  Then, subtract her salary to see if you can continue your current lifestyle on your salary alone.  If you are like most couples, you won’t be able to.  However, don’t despair.  Once you know how much your negative shortfall is, you will also know exactly what you need to do to make it on one salary.  Here are some tips:

2. Make A List of Expenses

List expenses you be able to avoid if she stays home.  Some possibilities are child care, clothing for work, travel to work, lunches out,  and car payment.  You also need to list additional expenses you may incur if she stops working, such as company provided health insurance.

3. Revise the Budget

If your proposed single income budget is close, try living on the new budget for a few months before the baby comes so you can prove to yourselves that you can do it.

4. Other Possibilities

If the numbers still don’t add up, consider some work she could do from home.  What is she passionate about?  Crafts?  Accounting?  Tutoring?  Piano or art lessons?  Try the home business, but make sure it is profitable before she quits her full time job.

5. It Isn’t Over Yet

If the deficit is still too great, don’t give up.  Could you afford this change if you had little or no debt?  You could take on a second job (temporarily) and use all the additional income toward debt reduction.

Set goals, stay focused and you can achieve your dreams.  I wish you well.

Other good reads:

Free From Broke: A Mother’s Struggle To Be a Stay at Home Mom

Securities offered through LPL Financial, Member FINRA/SIPC