By: Michelle Petrowski, CFP®, CDFA
There is certainly a gender gap issue that women face in pay, but there is also a larger one they face in retirement. Having left the workforce to raise families or care for aging parents, possibly having gone through a divorce and the longevity issue that brings with it higher medical costs in retirement all contribute to less lifetime retirement savings and higher expenses.
According to a report, released by the National Institute on Retirement Security on March 1, 2016 “women were 80% more likely than men to be impoverished at age 65 and older, while women age 75 to 79 were three times more likely to fall below the poverty level as compared to their males counterparts.” These findings are contained in Shortchanged in Retirement, The Continuing Challenges to Women’s Financial Future. Consequently, lower retirement savings and increased retirement expenses can create the perfect storm for a retirement crisis for women, if nothing changes.
Develop a spending plan/savings plan. It all starts with cash flow. In order to know how much you can save, you have to know what is coming in and what is going out (your spending). So track your expenses and set an initial savings amount. Remember no amount is too small – just start somewhere, stick with it and have a plan to increase the amount!
Four Ways Women Can Help Fill Retirement Savings Gap
Utilize Roth IRAs when possible.
Contribute the maximum needed to earn an employer match in tax-deferred plans like a 401(k).
Maximize annual Health Savings Account (HSA) contributions in high deductible healthcare plans.
Don’t forget the Saver’s Tax Credit.
Roth IRAs/Roth 401(k)s
When eligible, maximize your annual Roth IRA contribution and utilize Roth conversion strategies when appropriate. A Roth account allows tax-free compounding and paying tax on retirement savings now, while in a lower-tax bracket, saves money in the long-run. When withdrawals rules are followed the withdrawals, including earnings, will be tax free in retirement and since she can withdraw her original contributions at any time without a penalty, her money is not tied up. Being in a lower tax bracket may be the case for many women due to the gender pay gap, a single lifestyle or supporting single parent households.
Health Savings Accounts
As women we live longer, will most likely be single without a partner to take care for us and will have the added concern of higher medical costs for a longer time period in retirement. When covered by a high deductible healthcare plan, a Healthcare Savings Account can offer four benefits to women looking to reduce the retirement gap. Contributions are tax-deductible, so taxes are reduced now. It allows savings for future costs, while the earnings grow tax free. HSAs allow tax-free withdrawals for qualified medical expenses – this is particularly important in retirement when healthcare costs will be higher. Lastly, HSAs are portable even if you leave your job or the workforce, so you do not have to “use it or lose it” in a single year.
Tax-deferred accounts, like a 401(k), also allow money to grow tax free and the employer match is “free money” that helps a nest egg grow quicker. So contribute the minimum needed to take advantage of an available employer match so that you are not “leaving money on the table.”
There is a tax credit specifically for low-income workers who save for retirement. So if a woman contributes to a retirement account such as an IRA, Roth IRA or 401(k) and her modified adjusted gross income is less than $30,750 in 2016, she may be able to claim the Saver’s Credit on her tax return. This credit is worth up to $2,000 for individuals and can be used to reduce the federal income tax she pays.
Consult a Certified Financial Planner for comprehensive advice on these and other strategies that address your retirement planning needs.
Michelle Petrowski is the Founder of Being Mindful in Divorce. She’s a divorced single mom, passionate about using her professional experience as a CFP® & CDFA™ and personal journey to support women in transition; creating confidence through education so they can make financial choices with peace of mind. Bringing together a background in investment management, tax prep and retirement planning, to provide Divorce planning (with singles or couples) and Financial Coaching services, financial literacy workshops and writings.