The Importance of Retirement Preparation for Women

Written by Andrea Solana, CFP™

Retirement Planning in general has come into greater focus in the last thirty years with increasing life expectancies, increasing costs of medical care and a decreasing ability to rely on final salary pension provisions. Also, one thing we know for certain is that life is uncertain. We should always expect the unexpected and prepare accordingly. Without proper planning for retirement, it can be nearly impossible to understand whether you will have enough income and capital to provide for your retirement needs and know whether it will provide for your needs in a way that is also satisfactory for you. Women generally tend to live longer than men, so the significance of adequately preparing for retirement is arguably even more essential.

The topic of retirement planning for women is especially important due to the fact that women still tend to fall behind their male counterparts when it comes to preparedness. Lifetime earnings tend to be a direct driver for savings and the net estimated lifetime earnings for men and women with a bachelor’s degree currently in the US stands at $2.19 million and $1.32 million, respectively.[1] In the US, for men and women with a graduate degree the net estimated lifetime earnings is $2.68 million and $1.69 million, respectively.[2] Additionally, women tend to reach their peak average earnings much younger around age 44 versus age 55 for men.[3]

A 2020 Women & Retirement Report[4] published by Scottish Widows reveals progress has been made in recent years with respect to adequate savings rates between genders. Between 2013 and 2020, the percentage of women deemed to be saving adequately increased from 40% to 59%. During this same time period, the percentage of men saving adequately increased from 49% to 60%. Saving adequately, in the Scottish Widows report, is defined as individuals saving at least 12% of their income or in a defined benefit scheme. While this is an encouraging trend, given the definition of adequate saving as a percentage of income, it does little to unmask the fact that women on average are saving less overall, due to the income differentials, which in turn contributes to the widening pension savings gap between women and men.

There are obviously a number of reasons that lead to the differential in estimated lifetime earnings, some of which are common life events that tend to widen the savings gap. These most commonly can range from career interruptions or reduced working hours due to care giving of children and other family members and divorce, among other things. When many women may be ‘peaking’ in their average earnings, this tends to also be the same time that many household expenses are dictating pre-retirement spending priorities. Retirement savings inevitably tends to fall lower on the financial priority list.

Understanding the backdrop provides some context to the problem that exists.  As noted above, some progress has been made towards closing this gap but there is still more work to be done.  However, what are some concrete things that women can do to aid their retirement planning?

1.    Ensure you remain engaged in household finances and savings plans

While this trend has been somewhat subdued in recent years, there remains a tendency among women to delegate household finances to their spouse and limit their involvement and understanding. This can lead to multiple problems. First, when you are disengaged, it likely means there is less knowledge of what you are saving and you are more likely to spend unconsciously. Second, with longer life expectances, it is likely that a woman will need to take on the primary role of managing the household finances at some point in the future. Taking over that role, and having a pre-understanding of where and what everything is, will be invaluable during any period of transition.

2.    Save into a pension even during periods of career interruption

A basic premise to saving and investing is saving early and often. Even just a little bit adds up and allows the growth to be compounded over time. Women often tend to be more conservative investors than men, so while the temptation may be there to hold on to cash, it is important to not hold onto too much cash as inflation will work against you over time. It can be extremely beneficial to prioritise trying to make some level of a pension contribution no matter whether you are working full-time, part-time or taking a break for a period of time.

In the last few years, auto-enrolment into UK workplace pension schemes began to make sure that a minimum contribution was being made for those working. However, it is often the case that even those who are temporarily not working may still be able to direct some funds towards a pension. In the UK, even in years where an individual does not have any earned income, annual contributions of up to £3,600 gross can be made. Individuals would contribute up to £2,880 with 20% basic rate relief being added to the pension for a gross contribution of £3,600.

Additionally, US taxpayers who file joint tax returns with a working spouse who has qualifying earned income, may have the opportunity to make annual IRA contributions based on their spouse’s income. In 2021, individuals can put up to $6,000 into an IRA ($7,000 if aged 50 or older) with qualifying income. An IRA will provide another tax deferred tax wrapper to utilise for your long-term pension provisions.

3.    Understand your UK State Pension and US Social Security entitlements

Anyone working in the UK and making National Insurance contributions will be building up an entitlement to a future State Pension benefit. You must have 10 qualifying years of contributions to earn a benefit, but you will not maximise your benefit under the New State Pension until you have 35 qualifying years. It is beneficial to review your National Insurance record (via Government Gateway) periodically as there is often opportunity to voluntarily pay a fixed amount to fill any gaps in your record. You can usually only pay gaps in your record from the last 6 tax years. However, there is currently an opportunity to make voluntary contributions before 5 April 2023 related to gaps in your record between April 2006 and April 2016.

Paying voluntary contributions is relatively cheap in relation to the extra benefit that is picked up over the course of your retirement years. It is also relevant to note that it can be possible to gain credits on your record for years that you spend as a carer so you want to make sure you are given credits on your record where warranted.

Conversely, anyone who has worked in the US for 10 years or more (and gained 40 credits) likely has a future US Social Security entitlement. While there is no easy way to make voluntary contributions to fill in gaps in your US Social Security record, it is important to factor in this projected benefit into your overall planning.

Individuals living in the UK with a built-up Social Security benefit are entitled to receive that benefit alongside a UK State Pension benefit.  However, you should be aware of something called the Windfall Elimination Provision (WEP) which may impact your eventual US benefit should you have more than 10 qualifying years but less than 30 qualifying years of substantial earnings in the US.  Should the WEP apply, there is a maximum reduction that can be applicable and net it is always beneficial to still collect both entitlements despite any possible reduction.

If you are unsure about the benefit of making voluntary contributions it can be beneficial to speak with the Future Pension Centre for any questions and it can also be helpful to seek financial advice to apply any rules to your individual situation.

4.    Remain in some kind of work for as long as possible

The UK State Pension age is currently age 66 (with it set to increase to age 67 in 2029). While you can collect your benefit from that point, it should be noted that you have the option to delay the start of your State Pension benefit payments. Should you delay, your State Pension benefit will increase by the equivalent of 1% for every 9 weeks you defer which translates to an increase of just under 5.8% every year.

For individuals who are born in 1960 or later, your US Social Security full retirement age is age 67. While you can begin to take benefits as early as age 62, your benefits will be reduced permanently during your retirement years. Similarly, you can defer your benefits from full retirement age and begin collecting any time between full retirement age and age 70. For every year that you defer your payments your benefit will increase by 8%.

For individuals who have limited assets elsewhere, are looking to maximise their pension income provision during their retirement years, and are healthy enough to maintain some level of work into their 60’s, it can be materially beneficial to continue some earned income stream for a few extra years and delay the receipt of both pension benefits. This will allow you to pick up on the increases in pension annuity income that the government offers for deferring the start of your payments.

No matter your current financial situation, small steps can be taken to close the pension savings gap as much as possible in an efficient manner and help prepare you for your retirement years. If you have never undergone retirement planning, it is never too early or late to start. The earlier you have a handle on whether your retirement savings are sufficient for your desired needs, the more opportunity you will have to allow your savings to work for you rather than against you.

[1] https://www.ssa.gov/policy/docs/research-summaries/education-earnings.html
[2] https://www.ssa.gov/policy/docs/research-summaries/education-earnings.html
[3] https://imdiversity.com/diversity-news/women-see-their-wages-peak-earlier-and-lower-than-men/
[4] https://adviser.scottishwidows.co.uk/assets/literature/docs/2020-women-retirement-report.pdf 

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