What images come to mind when you think about your retirement? An annual holiday in Europe, perhaps? Maybe even splurge on a business class ticket? Well, if you’re female, you should start thinking about the back end of the plane.
On average, women need to save a significantly higher portion of their take home salary in order to have the same lifestyle as men in retirement. How much more depends on their appetite for investing.
I’ve run some rough numbers to illustrate this point—let’s call our examples John and Jane. Both John and Jane start working at 21, and retire at 60. They each earn the Australian median income for their gender throughout their working life and are taxed at current rates. Their employers contribute 9.5% of their gross salary into superannuation accounts, and they save an additional 2.5% of their take home salary each year until they retire. This is a pretty decent start. But while John’s annual income in retirement is $80,000, Jane only receives half that.
Jane lives longer than John, and earns less
Australian women born in 2018 are expected to live four years longer than men born in the same year. This might not sound like much, but it costs Jane almost $7,000 per year in retirement. Holding everything else constant, in my example Jane would need to retire with around 10% more to receive the same annual payment as John.
Which isn’t easy. The median income for women in Australia is around 30% less than their male counterparts. I’ll let you debate the whys well away from the Forager blog, but it is a simple fact for now that Jane needs to save more than John for retirement, while earning almost a third less.
Jane is sitting out
The last hurdle Jane needs to overcome is that she is probably going to earn a lower rate of return on her investments.
There are a lot of articles stating that women have a lower risk tolerance than men. I can’t find any hard data to back that up, but anecdotally I agree. Almost every adult male I know invests. I struggle to think of a female friend that does. There are many potential reasons for this, including a lack of interest in finance and investing. But there are plenty of women who are interested and just don’t know where to start.
Either way, it leads to women holding more (or all) of their savings in cash. I have assumed a very low savings rate in my example, so the impact of this is minimal. But it becomes more meaningful as the savings rate increases.
As we are about to see, that’s exactly what Jane needs to do.
Save more, earn more and pay less tax
I’ll present three options below—all of the examples have the same life expectancy and lifetime earnings as Jane. While increasing savings is important and obvious, what Jane does with those savings makes a big difference, too.
Harriette High Saver is risk averse, but she is a great saver. She manages to save 50% of her take home salary each year of her working life, and keeps it all in cash. She ends up with $1.5 million at retirement and will receive a similar annual payment to John. Harriette’s strategy is risk free, but it isn’t much fun.
Better investment choices
Risky Renada, on the other hand, saves just 11.5% of her take home salary, and invests 80% of that into equities over the long term. Her balance grows to just over $1.1 million at retirement. Whilst around 25% less than Harriette’s balance, higher returns throughout Renada’s retirement will compensate, albeit with more risk. I know, from personal experience, that shifting attitudes to risk is hard. But this is probably the most important leap females need to make.
Renada could do even better, though, if she paid less to the government.
Superannuation Sonya salary sacrifices 7.5% of her gross salary into her superannuation (try saying that five times fast), and saves nothing outside of that. The tax benefits of this strategy allow Sonya to keep a larger portion of her salary throughout her working life. Sonya’s retirement balance is slightly lower again, but her annual payment is still relatively in line with the other options, thanks to higher returns.
You need to start early
On average, women live longer than men and earn less throughout their working lives. This can result in a significant gap in the retirement savings of men and women. As we have explored, they need a combination of higher savings, better returns and less tax to make up the difference.
But, in order for any of the above options to be effective, women need to start early. I don’t know many 21-year-old women thinking about their retirement savings when they first start working. That needs to change.
Inflation-adjusted annual return on superannuation – 5.4%
Inflation-adjusted annual return on equities – 5.0%
Inflation-adjusted annual return on cash – 0.0%
* Assumes no tax on investment income or capital gains. Superannuation contributions are taxed at 15% and withdrawals are tax-free from 60 years of age. With the CGT discount applied, annual payments from equities (excluding superannuation) in retirement in all five scenarios would be below the tax free threshold. Assumes that any taxes throughout working life would be paid from additional savings.
11 thoughts on “Three Ways Women Can Close the Retirement Gap”
All 3 are useful but sustainable savings are most leveraging. A dollar saved is after tax whereas a dollar earned is pretax. Furthermore lower annual expenditure means much less lump sum is needed to retire. Hariette has the same payment as Sonya and Renada in the table, but she probably only needs half of it because of her lifestyle, and therefore will be financially independent sooner. That’s why the early retirement crowd are so focused on savings rates, i wouldnt advocate too much frugality but everyone can make moves in this direction.
One way career women can do this, is to work swap roles more readily than they currently appear to do. I’ve been a stay at home Dad for 17 years. I’ve had an absolute hoot, however as a result my personal wage gap is huge.
What I’ve noticed though is that whilst plenty of career focused men are happy to marry a potential stay at home mum, very few career focused women want to do the reverse and nearly all end up marrying someone with equal or higher career prospects. 25 years ago I worked at the lower paid end of the hospital pay scale. It was obvious that plenty of male doctors were happy to marry female nurses (who as soon as kids came along mostly quit their job and cared for kids) but despite the explosion in the numbers of women doctors and male nurses the reverse rarely happens.
“Almost every adult male I know invests. I struggle to think of a female friend that does.”. That is rubbish and simply insulting!
Chloe isn’t saying that women don’t invest. She’s just stating an anecdotal observation based on her particular set of interpersonal relationships. The broader point, that women are less likely to invest in shares than men, still stands. For instance, a recent ASX Australian Investor Study 2017 conducted by Deloitte found that 44% of men owned on-exchange shares vs 31% of women. If you were to expand the sample to include the general population, I wouldn’t be surprised if the gap increased. Though my wife would be one of those women who own shares in her name, but only because I invested on her behalf…
This is also my observation where I used to work. (Women slightly outnumber men). They don’t like investing in shares, however once you talk about property , negative gearing and the like their eyes light up. For some reason they believe you can make as much money with property but with lower risk than shares.
There is a case to be made the opposite is true. I would argue most people buy shares with cash (savings) yet most people buy property with a mixture of cash (savings) AND debt. The debt increases risk.
I think part of the reason women (who tend to be more risk averse) believe shares are riskier than property is because they have a scoreboard which shows you how far prices have dropped. Property lacks this scoreboard until you sell many years later. One does not see the ups and downs of property every day as with shares.
I am very surprised that you calculate $80000 annual income on ca. $1 000 000 savings. How have you arrived at that? I think it is a bit more than half of your estimate.
Hi Karol – you mention the term income. My calculations are based on an annuity stream that is amortised over the retirement period. The amounts that aren’t paid out continue to generate returns. So the annual payment of $80k or so is made up of both investment returns and principal.
I’m a dad and have 2 daughters. Friends tell me the ‘bank’ of mum and dad provides significant equity for their kids homes.
Would some be better directed to their daughter’s super accounts?
Does 10000 at 25 compensate for Jane’s shortfall?
Great post shared. I guess this will not only work for women but for others as well who are planning for retirement investment. Retirement planning is when retirement income goals and the decisions required to achieve those goals. I am 45 and near to retirement. I have been investing in stock markets for long and would suggest starting early as you said. I am now planning to invest in some blue-chip dividend, best penny stocks, lithium stocks as trending small caps. I hope these will give a better return later on.
Good article, not sure if my wife is typical but she is very risk adverse and it took a lot of encouragement from me for her to invest even a small part of her cash in an index fund. Investing earlier may have made her more comfortable with market volatility.
I agree with Karol and question though whether someone aged 60 with a retirement balance of $1 million should be withdrawing 80K a year. This is an 8% withdrawal rate and all the example characters will run out of money within 20 years at age 80, probably with quite a few years of living left to do. Only John and Renada have a high enough equity allocation that could possibly maintain this 8% rate and only if they had been lucky enough to retire at the start of a long bull market.
Nice informative article Chloe, the woman in my office tend to be less geared towards investing in shares too.
Anyway on a slight tangent I found an interesting video discussing the pay gap between male and female, if your interested: https://www.youtube.com/watch?v=c6OeUKu6Jyw