Retirement at Risk: Women Live Longer but Save Less


NEW YORK (MainStreet) — Living longer but saving less will put retirement plans at risk. And that's a dilemma women are facing. A new study by Aon Hewitt says that women save less for retirement than men -- and combined with longer life expectancies, that's putting their financial wellbeing at retirement in jeopardy. But there are take active steps they can take to put their after-work life plans back on track.

According to an analysis of more than 140 401(k) plans representing 3.5 million eligible employees, women are participating in their employers' defined contribution plans at the same rates as men, but they save less -- an average of 6.9% of pay, compared to 7.6% for men. In addition, nearly a third (31%) of women contribute below the company match threshold, compared to just a quarter of men. And that contributes to the fact that women have 401(k) balances that are significantly less than men. While the average plan balance for women is $59,300, it's $100,000 for men. The finding is consistent across all salary ranges.

"Women face a number of challenges when it comes to saving for retirement, including gaps in their career when they are not actively contributing to their retirement and longer life expectancies," says Patti Balthazor Björk, director of Retirement Research at Aon Hewitt. "However, there are factors that women can control to boost their retirement savings, such as how much they contribute, how they invest over time and whether they keep assets within the retirement system."

Women also see their retirement prospects penalized by defaulting on 401(k) loans. The study shows that even though both sexes take loans from their retirement savings at similar rates, when leaving a job women are more likely than men to default on a loan. Nearly three-quarters of women (71%) who terminated employment while carrying a 401(k) loan failed to repay it, compared to 64% of men.

"There is little impact to long-term savings if loans are repaid in full and if individuals continue to contribute to their retirement savings while they repay the loan," explained Björk. "However, the real threat to financial security comes when participants default on loans, most often at job termination. Unpaid loans are subject to taxes and penalties that create a permanent loss from workers' retirement savings."

The study suggests steps women can take to enhance their retirement savings:

  • More and sooner -- Women can boost retirement savings by saving more and starting sooner. Aon Hewitt's research shows that in order to accumulate adequate retirement savings, individuals without pensions would need to have at least 15% of compensation set aside every year if they start saving at age 25. Starting at age 35 increases this amount to nearly 25% of pay every year. Increasing retirement contributions by as little as 1.0% each year for five years and maintaining that higher savings rate until retirement can allow the average employee to retire at age 65 with adequate savings.
  • Make the match -- Women who are contributing below their company's match threshold are essentially missing out on free money. For example, entitled to a dollar for dollar company match up to 6.0%, but contributing only 3.0% of pay to a 401(k) will result in a $772,500 savings balance at retirement. However, contributing a full 6.0% of pay (the company match level), could mean a $1,545,000 balance at retirement age.
  • Make it automatic -- Automatic features, such as systematic contribution escalation, can help women gradually increase the amount they are saving for retirement with minimal effort. According to the study, only 15.4% of women enroll in automatic contribution escalation.
  • Avoid loans -- While there may be times when women need to turn to withdrawals or loans from retirement savings to cover expenses, they should tap these funds only as a last resort and only for true hardships.
  • Use the tools – Research indicates that workers who used help tools, such as target-date funds, managed accounts and online advice, experienced annual returns nearly 3.0% higher than individuals managing their 401(k)s on their own.

--Written by Hal M. Bundrick for MainStreet

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