Women: The Startling Price Tag For “Opting Out” Of Work

woman home with child

Opting out of the workforce to stay home with children or aging parents provides enormous personal satisfaction, but there’s unfortunately a financial cost

Many working women interrupt their careers to care for children or aging parents, causing them to lose out on income, retirement savings and benefits, and advancement opportunities. The exact price tag could be startling high.

A difficult decision

The average woman “opts out” of the workforce for 11 years, says journalist Reshma Kapadia, writing for Barron’s.

And while many of those women do seek to return to work later, they can find their skills and professional networks have become outdated, forcing them to take part-time or lower paying jobs.

The decision to “opt out” is very personal, and every woman has to make the choice that’s right for her and her family.

We’ve seen many of the women we work with struggling with this decision. Some have left the workforce for twenty years or more to raise children, and others have curtailed their careers to take care of aging parents. There are satisfactions and costs involved in every decision, which makes it a very difficult one for most people.

The financial cost of “opting out”

The cost in lost retirement savings is just one factor in the equation, but Kapadia suggests the total could be huge. Using estimates prepared by Morningstar (see chart below), Kapadia says the average 11-year hiatus from the workforce could cost women $570,000 in lost retirement savings. The cost rises to $900,000 for a 20-year absence from the workplace.

Add to that the reduction in Social Security benefits, which are based on lifetime earnings. For every year a woman is not employed, Social Security notes her earnings as “$0,” reducing her potential benefits down the road. She’ll lose out even more if the value of employer benefits, like a 401(k) match or health insurance, is factored in.

On the flip side, not working saves in day care and other costs, and can provide many families with the quality work/life balance they’re seeking.

Your “must do” list to minimize the financial damage

It’s much more challenging to keep retirement savings on target when the household is living on just one income. But there still important steps you can take to protect your financial security.

Spousal benefits. Even if one spouse does not work, they can still contribute each year to a spousal Roth or  Traditional IRA. The same annual contribution limits apply ($5,500 per year, or $6,500 per year if age 50 or over by year-end).

Stay on budget. If you’re living on just one salary, it’s extra important to keep a lid on spending. Make sure you spend less than you earn and avoid running credit card balances or incurring other debt.

Max that 401(k). The one spouse in the workplace needs to take maximum advantage of employer benefits, including the 401(k) plan. Make sure you contribute the max ($18,000 per year, or $24,000 for those 50 or over by year-end). After all, you’re saving for two people. Self-employed? Even better. You can set up your own retirement plan and save even more.

Go long. Families can capture all the benefits of long-term compounding – even without access to workplace retirement accounts – by socking money away in a personal brokerage investment account. Don’t despair – there’s a definite silver lining. You may not get the benefits of tax deferral, like you would in a workplace retirement account, but you do get to take advantage of those super-preferential low capital gains tax rates and can always access your funds without penalty.

Pay down principal. Beef up savings by paying extra principal on your mortgage each month (just write a bigger monthly check to your bank and note the extra principal payment on your monthly bank mortgage coupon).

Stay on track. Whether one or both spouses are working, keep track of where you need to be and periodically monitor your progress. Your goal is to save 10-15% of gross income each year through workplace or other savings.

morningstar dropping out

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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