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.
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Many articles make similar observations regarding the so-called gap. However, I have yet to see one acknowledge that for most of our retirement years, most of us remain in long standing domestic partnerships, usually with someone of the opposite sex. Typically, they share expenses from shared income throughout life, the man dies first, the woman inherits his remaining super balance and all is good from a woman's super perspective. Sure, some never partner up long term, some multiple times and incomes will rarely be equal within a partnership, but the fact remains that for most people, our retirement savings are a shared asset. Certainly in the divorce courts. So, the gap is much less of an issue than the industry would like us to believe.
...I agree with John, but none-the-less an interesting article. I'll be passing it on to my 18yo daughter. She probably won't be very interested but at least I've tried!