Women: You’re Leaving “Free Money On The Table” With 401(k)s

EconomyMany women fear they’ll end up as the proverbial bag lady, running out of money years too early and forced to eat cat food or move in with the kids to make ends meet.

It could be there’s some truth to those fears.

We know that women still make less than men, on average, in the workplace.

We also know they are more likely to interrupt their working years to take care of children and parents.  

What we don’t always understand is why women make choices in the workplace that result in consistently lower 401(k) account balances than men.

According to a new study by benefits experts at Aon Hewitt, “the average man’s 401(k) balance at the end of 2012 hovered around $100,000, (while) the average woman had amassed just $59,300.”

Since 401(k)s are now the primary means of saving for retirement, lower account balances can most certainly lead to women running out of money. There are several factors at work here, says the Aon Hewitt report:

Women save a lower percentage of salary

What’s odd is that more women actually participate in their 401(k) plan than men, but at every salary level, save less as a percentage of salary.

We’ve actually seen this with some of the successful career women we work with. They can afford to maximize their contributions, but hold back, thinking perhaps that it is “safer” to squirrel the money away in a 0% checking account where they can get to the money if needed.

Their misguided caution can undermine their retirement. Not only are their long-term savings earning nothing, but their funds will shrink each year due to the tax bite. Retirement savings opportunities are “use it or lose it.” For each year lost, it becomes harder to catch up.

According to Aon Hewitt, about one-third of women “fail to take advantage of the full matching contribution available from their employers—the equivalent of leaving free money on the table.”

Hewitt echoes the advice we’ve been giving to clients for years: “Individuals without pensions should save at least 15% of pay annually if they start saving at age 25. Starting at 35 requires savings of 25% of pay per year.”

So ladies, make sure you contribute enough to get the full employer match. And each time you get a raise or bonus, seize the opportunity to stuff more money into your 401(k).

Women default more on 401(k) loans

While roughly the same percentage of men and women took out 401(k) loans, women were more likely to default. The biggest problem was women leaving their jobs with unpaid 401(k) loans, a financial misstep that immediately triggers taxes and penalties.

401(k) loans should only be used as a last resort (that’s why recommend that everyone keep an emergency fund!), and those taking them should think carefully about how they plan to pay them back. It seems obvious, but if retirement funds are tapped before retirement, they will no longer be available in retirement.

Women often need professional help – and do better when they get it

A joint Aon Hewitt/Financial Engines report concluded that women often lack the financial education they need, and workers who get professional advice and assistance earn nearly 3 percentage points more per year than those managing their 401(k)s on their own. That can make a huge difference over their careers, and result in much healthier retirement balances.

Women often make the mistake of putting others first

For many women, it’s no secret why they save less and have less.  They are so busy doing for others that they don’t have time or money  to do for themselves. When surveyed, women are more likely than men to say “other financial obligations interfere with their retirement savings.”

The Aon Hewitt report says “women are more likely to work part-time, are more likely to help defray expenses for family members, and are less likely to know how much they need to save for retirement to begin with. In addition, women are more likely to take breaks in their careers—which often leaves them more stretched financially, and thus less able to save at a higher level.”

While wanting to care for and spend time with family are certainly good things, they can have negative consequences.

Women need to learn that one of the best ways to help their children and family, and teach important lessons about financial responsibility (especially to their daughters), is to plan and save for their own financial future.

Keep in mind that failing to save for retirement, and running out of money in your old age, doesn’t make life any easier for your partner or children, or make you a better or more loving parent.

The takeaway:  Take a moment to check the level of your own retirement contributions.  If you are worried about whether you are still on track for retirement, or want to make a fresh start, give us a call and we can give you helpful tips to point you in the right direction.

About Mari Adam

Mari Adam, Certified Financial Planner™ 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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