Combine career breaks with a persistent wage gap, and by the time women make it to their golden years, they’re usually far less financially prepared for retirement than men of the same age.
Call it the motherhood penalty, because that’s how it often starts. Mothers are more likely than fathers to take career breaks or work part-time for a few years to take care of young children. When they return to full-time work, they also tend to earn lower salaries than their male counterparts. As a result of this wage gap, women accumulate smaller nest eggs to invest for retirement and receive lower Social Security benefits. Then, once they do hit retirement, women also have a longer life expectancy than men — so their savings must stretch over a longer period of time.
“If you’re a working women with children, it’s kind of inevitable — you could lose a promotion, get overlooked, and probably be out of the work force more than men,” said Laurie Ingwersen, a senior wealth management advisor with the Harvest Group.
[See: 11 Great Investing Tips for Women.]
It’s no surprise then that the research shows women are more likely to be impoverished in their golden years than men. A 2016 study by the National Institute on Retirement Security found women are 80 percent more likely than men to fall below the poverty line at age 65 and older.
Here are three tips to narrow the motherhood gap.
Oversave and underspend. “So what can you do if you want to take a career break? Like your other life goals, you should plan and save for it,” says Sallie Krawcheck in her blog on LinkedIn.
The former Citigroup and Bank of America Merrill Lynch executive is also the CEO and co-founder of Ellevest, a robo advisor serving female investors. She speaks frequently about the motherhood penalty, advising women to fully understand the long-term costs of career breaks, before taking one.
She gives the example of a hypothetical woman named Elle, a 30-year-old professional woman who earns $85,000 a year:
“She saves 20 percent of her salary and stashes it in the bank. She plans to take a two-year career break in five years. When she returns, she takes a 20 percent pay cut. And it impacts her every year for the rest of her career, since she’s getting raises off of a lower base,” Krawcheck says. “How much does this cost her, in aggregate earnings, over 40 years? One-point-seven million. That’s how much less she earns over that period of time. And where does this leave her as a grandma, when she retires? About $400,000 poorer.”
One of the keys to narrowing this gap lies in supercharging your savings at a young age — sometimes years before you’re even contemplating starting a family.
“The motherhood penalty really requires that women who want to work and then take off and have a break, need to really think about saving earlier,” says Jamie Cox, managing partner of Harris Financial Group. “Even though it may not be something they can do in their budget when they’re younger, it is critical when they want to overcome that gap.”
Of course, that’s easier said than done, as Cox says. If you’re just starting your career, your earnings may still be at a low level, and you may have to prioritize other goals too: like paying down student debt and saving for your first home. So what to do then?
[See: 10 Tips for Couples and Young Families to Build Wealth.]
Try oversaving later in life, too. Although you won’t reap the rewards of the longer time horizon, every little bit still helps.
Meanwhile, develop a habit of spending below your means, Ingwersen says.
“Once you start spending, if you make more money, it’s hard to reduce that and go back,” she says. “One thing women tend to do is spend all of their cash on household items — the wife could be spending money on the groceries and summer camps and not really focusing on saving at that point. Develop a mentality of paying yourself first, so it’s out of mind, and your savings are working for you at that point.”
Freelancing or working part-time. Even if your top priority is to take care of loved ones, you may want to consider working occasionally as an independent contractor or freelancer to continue your retirement savings.
Self-employed workers have several retirement products available to them including SEP IRAs, SIMPLE IRAs and Solo 401(k)s. All three of these plans offer higher contribution limits than the traditional individual retirement accounts and Roth IRAs available to the broader workforce.
That’s because as an independent contractor, you’re considered a sole proprietor. You can essentially act as both the employee and employer in saving through these products.
The Solo 401(k) typically allows you to sock away the largest sum. Just as with other 401(k)s, you can contribute up to $18,000 as your employee share. But then you can augment that, with up to another 25 percent of your year’s wages as the employer’s share, provided your total contributions do not exceed $54,000.
With a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, you can defer up to $12,500 of your salary, and then, as the employer, match those contributions dollar-for-dollar up to 3 percent of your net earnings from self-employment.
Finally, with the SEP IRA — or Simplified Employee Pension — you can contribute up to 25 percent of compensation to the plan, as long as it does not exceed $54,000 in 2017.
Spouse saves in your name. If you didn’t earn a wage this year, traditional and Roth IRAs may still be an option.
[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]
If you’re married, your spouse is employed and you file a joint tax return together, you may qualify for a spousal IRA. A working spouse can make an IRA contribution up to $5,500 on behalf of a non-working spouse or a spouse who has little income.
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