When It Comes to Retirement, Girls Just Want to Have Funds

Earlier this year, the National Institute on Retirement Security (NIRS) released a report with a startling finding: “Across all age groups, women had substantially less income in retirement than men,” and were 80% more likely to be impoverished during their so-called “golden years.” As they aged, the situation worsened: Women between 75 and 79 were three times as likely to fall into poverty than their male counterparts.

For women 65 and older, their typical incomes were 25% lower than those of men, according to NIRS. The gap widened as they aged: Men enjoyed an “income advantage” of 44% by age 80 and older.

Bottom line: Women are far more likely than men to face financial peril in retirement.

It’s a dire reality that has not escaped the notice of Diane Garnick, chief income strategist and managing director for TIAA (Teachers Insurance and Annuity Association), and a trustee of CFA Institute Research Foundation.

At a recent Research Foundation and CFA Society Dallas/Fort Worth dinner, Garnick exhorted the audience to simplify and customize retirement offerings, especially when it comes to women.

“If you think about the retirement business, people say, ‘It’s so complex. It’s impossible for us to calculate and understand how much money [we are] going to make,'” Garnick said. “The net result is people do nothing. People get paralyzed. They say, ‘Okay,’ or worse, they make a decision that they think is great, and it ends up the only thing they’ve done is given themselves some security that might not actually be true.”

The retirement business, she said, can be summarized in five simple words: income smoothing and standard of living.

“All we’re trying to do is think about how much money we make over time, and make sure that [the] standard of living we get stays with us so that, when we hit retirement, we don’t have to have a significant decline,” she said. “Nobody wants that red line to be pointed down. That downward slope scares us.”

When it comes to retirement planning, individuals and their advisers cannot assume that expenses are going to be the same for men and women and that averages apply, so customization is key.

Garnick said that in today’s world, “there’s absolutely no reason, given technology on one hand and financial engineering on the other, that every single person can’t have a customized strategy. It should be very easy.”

She laid out three essential factors that must be taken into account when it comes to retirement planning for women:

1. Fewer Working Years and the Gender Pay Gap

Over their lifetimes, women generally work fewer years than men and earn less. Garnick said one of the first decisions women have to make in their careers is whether they’re going to take a break to have children. Some women decide to “opt out” and rejoin the workforce later, either part time or full time. These decisions can have big effects on the hours worked over a lifetime and the amount saved.

“If we look at all of the different sacrifices that are made, women outpace the men in every single category: fewer hours worked, significant time off, flat-out quitting jobs, and even turning down promotions. Ladies end up having a much shorter work life,” Garnick reported. “That absolutely has to change the way we tell people how to invest, or the percentage to invest.”

It is also well known that daughters are more likely than sons to assume the primary responsibility for caring for a frail parent or in-law. And with more people living well into their 80s and 90s, this responsibility can last a very long time. To cope, many women switch to part-time work or quit their jobs altogether.

This is all compounded by the gender wage gap. In 2015, women working full time in the United States made only 79 cents for every dollar earned by men.

This means that in order to catch up on retirement savings, women have to work longer. But it’s not just the length of time they will need to work, they will generally be saving from a lower income base too. Retirement benefits are a function of accumulated earnings over the course of a career, so the gender wage gap can quickly become a retirement wage gap.

2. Longevity and Health Care Costs

According to US data compiled by the Social Security Administration, “a woman turning age 65 today can expect to live, on average, until age 86.6.” For men, life expectancy at 65 is 84.3. Also, “about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95,” emphasizing the point above about taking care of elderly parents or in-laws.

Not only do women live longer, meaning they need to stretch their income over a longer period, they also face higher health care expenses in retirement. This is significant when one considers that medical costs are the largest single expense many people face in retirement.

3. Risk Tolerance and “The Cash Drag”

Garnick noted that women tend to hold more cash than men, which is an opportunity cost and a drag on returns.

When all these factors are taken into account, “it’s really important that we think about all of these structural flaws we have in terms of not providing personalized savings rates,” she said. “That’s really key.”

It’s not hard to see why one can’t apply “an average savings rate” for everyone.

“When we say to people: ‘The average person needs 5%, 10%,’ we’re not giving them the specific information they need,” Garnick said. “Of course they’re making bad decisions. It’s because we as a profession are not giving them adequate tools. We need to walk through an analysis of their specific income needs in retirement, and savings strategy.”

What is the solution?

“Saving money while earning less is not the only solution,” she said. “Other solutions that are already available are supplemental savings. We need to tell people — by the way, not just women. We need to tell people who are going to have a shorter work life, and we certainly need to tell people who are not going to have the opportunity to earn as much that they need supplemental savings. People [who] take time out of work to take care of family, to take care of their kids — they need supplemental savings.”

What would be ideal, she said, is if those savings were tax deferred.

Something else we need to seriously consider is that as men and women approach retirement, according to Garnick, “it makes a lot of sense for women to obtain a higher level of guaranteed lifetime income than it does for men,” for two very important reasons: They are going to live longer and their expenses are going to be higher.

In the end, retirement planning is about financial independence.

“It’s really key to make sure that all of those years of working get you the financial security you worked so hard to earn,” Garnick said, before telling the women in the audience that the key takeaway from her talk, aptly titled “Girls Just Want to Have Funds,” was “very simply, save now or die trying.”

Note: A Research Foundation Brief based on Garnick’s talk is forthcoming.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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