Five Secrets Of Women 401(k) Plans
How women can manage and invest their 401(k) plans like a pro
|Written by Tom Yeung, CFA | CDFA
Investment Advisor & Fund Manager, Jurnex Financial Advisors
Why are women 401(k) plans so important?
As a woman, you’ve probably heard it before: you need to save more for retirement. But to me, that’s always felt like rather unhelpful advice. That’s because it’s just such GENERIC advice. I get it!
I find that the majority of sound financial advice is targeted at men. And there’s an implicit assumption that women can use the same information. But we all know that’s untrue. Women face obstacles that men do not, including gender discrimination, lower pay, social pressure to prioritize children, and more.
That’s why I’d like to share some advice that’s specific to women’s retirement planning. And because saving for retirement is SO important, I recommend you reach out to a qualified investment pro before making final retirement planning decisions. But to get you started, here are my five secrets about women 401(k) plans.
What makes women 401(k) investing any different?
Firstly, you might be wondering why investing for women is any different.
In short? IT JUST IS.
Women face challenges that men don’t see.
My father passed away early, and so I grew up in a family of women. I saw firsthand the challenges that my mother faced in her investing and career. Even though gender discrimination is technically illegal, there are plenty of societal pressures to conform. It’s the reason why only 16% of investment professionals are women. And though almost 60% of bachelor’s degree graduates are women, by the time they reach mid-career, they’ll find that 70% of executives are men.
THAT’S the reason why women 401(k) investing is different. For women, the 401(k) plan isn’t JUST a retirement savings tool. It’s a way to help level the playing field for investments.
If you want to read more about women investing, see my article about women real estate investors.
What is a 401(k) plan
In short, a 401(k) plan is a tax-advantaged savings plan that’s sponsored by employers. Employer sponsorship is a critical difference. Unlike an IRA, your wages are automatically deposited into your 401(k) account and deducted from your taxable income. That means once you set up your plan, there’s nothing more for you to do.
To learn more about 401(k) plans in general, see my 401(k) Beginner’s Guide.
What are the benefits of a 401(k) plan?
Several vital benefits come with a 401(k) plan that isn’t gender-specific.
- Lower current taxes. 401(k) contributions reduce your current taxable income.
- Tax-free growth. 401(k) investments aren’t subject to capital gains taxes.
- Early withdrawal option. You can start withdrawing 401(k) savings at age 55 without penalty. IRAs require age 59.5.
- Borrowing from a 401(k). In an emergency, you can usually borrow against your 401(k) for short-term needs.
- Employer matching. Many workplaces match your contributions, making it even easier to save.
- Automatic contribution. Since your employer sets up the plan, contributions are made automatically from income.
For women, the benefits can be far more significant. That’s because 401(k) plans offer a shortcut towards reaching financial independence. Plans are established in the individual’s name, and you’re free to allocate up to $19,000 per year into the account. Many employers also offer matching options, allowing your savings to grow even faster.
That means you can build wealth fairly quickly through your 401(k). And for women, that’s important.
Do you qualify for a 401(k) plan?
Almost 75% of American workers qualify for either a 401(k) plan or a 403(b) plan. You should check with your HR department to see whether your workplace offers one.
Safe Harbor laws require employers with 401(k) plans to make them available to all employees over age 21 who have been with the company for over a year. In other words, employers cannot discriminate who they allow into the plan.
But if your workplace doesn’t offer a 401(k) plan, there are other tax-shielded accounts you can use to save.
- IRAs. You can contribute up to $6,000 to your IRA as an individual, or $7,000 if you’re age 50 or older. These work in a similar way to 401(k) plans, but you must deposit the money yourself.
- 529 College Savings Plans. For those with children, 529 savings plans can be an excellent way to help your kids save for college. And if your children don’t use the full amount, you can change the beneficiary to any other family member. That includes yourself!
- Ordinary Investment Accounts. Holding onto stocks or funds for more than a year qualifies you for long-term capital gains taxes, which range from 0-20% (rather than short-term capital gains of 10-37%). Ordinary investment accounts can be used for funding medium-term goals such as travel, or any emergencies as well.
- Real Estate. Mortgage interest deductions and depreciation can lower your taxes by tens of thousands of dollars. First and second-time homebuyer programs may qualify you for additional tax savings as well.
Regardless, if your employer offers a 401(k) plan, you should undoubtedly make use of it.
Five Secrets About Women 401(k) Plans
Now that we’ve covered the basics to the 401(k) plan, it’s time to examine the five secrets you need to know about women 401(k) plans.
1. Women 401(k) plans have lower participation rates
For women who DO have access to 401(k) plans, only 43% of women enroll (compared to 49% of men).
That’s because there’s a common misconception that leaving the workforce to raise children also means having to cash out your 401(k) plan. That can’t be further from the truth. Most workplaces will allow you to maintain your 401(k) program once you leave the company. And for companies that don’t, you can always move assets into a Rollover IRA. That’s where you transfer assets directly from your old 401(k) into a new IRA account in your name. You don’t trigger any taxes or penalties because there’s technically no cash withdrawal on your part.
So as a woman, make sure you’re not missing out on your company’s 401(k) plan just because you think you’ll have to leave the company. It’s still YOUR money.
2. Women have greater retirement needs
It’s well-known that women live longer than men. But few people realize how much MORE women need to save than men.
According to the Social Security Administration:
- A man reaching age 65 today can expect to live, on average, until age 84.
- A woman turning age 65 today can expect to live, on average, until age 87.
And don’t be fooled by averages. One in every three 65-year-old women will live past 90!
That means women typically need about 15% more savings by the time they retire. Most financial advisors would recommend having 8-10 times your salary saved by the time you retire. But for women, I recommend you target at least 10-12 times.
On top of that, it also turns out that women have about 7% higher medical costs than men each year. That’s because older people naturally require more healthcare. And even though Medicare will cover much of this, long-term diseases such as Alzheimer’s and certain cancers still need out-of-pocket payments.
So how can you conquer these higher needs in retirement? That’s right. You can save more in your 401(k) plan. Thanks to the power of compound interest, $1 invested in your 20’s with employer matching will turn into $14 (in today’s money) by the time you retire. And even if you’re in your 50s, $1 saved still turns into $4.
3. Women 401(k) plans help close the Social Security gap
According to the Social Security Administration, in 2018, the average women received just $14,353 in Social Security benefits, compared to $18,041 for men. There are three key reasons for the gap.
1. Lower earnings. Women tend to earn 80 cents for every dollar men do, and Social Security is calculated on wages.
2. Part-time work. Women are 2.5 times more likely than men to take part-time work, reducing Social Security benefits.
3. More likely to retire earlier. On average, women marry men that are 2.3 years older than they are, but couples tend to leave the workforce at about the same time. Early cash-out for Social Security means lower payouts.
Fortunately, 401(k) plans can help bridge this gap. While the Social Security gender gap is certainly wrong from a moral standpoint, our reality doesn’t change just because we don’t like it.
4. Women can use employer matching to catch up on savings.
A study by Vanguard showed some very stark truths about women and investing.
In aggregate, men’s account balances are more than 50% larger than women’s. But this difference reflects men’s average wages, not superior retirement savings behavior.
The gender wage gap is real
Even though gender discrimination is illegal in every state, women still earn less than men. Studies show that women make just 80% of what men do for the same work. And there’s sadly been little progress in equalizing this pay gap.
Is the gender pay gap fair? NO! But this is the world we live in. And while we should certainly join the cause for equal pay, we should also be prepared in case the gap doesn’t close fast enough.
Fortunately, almost half of 401(k) plans offer some form of employer matching. The majority of programs offer 3% matching, but around 10% offer up to 6% matches. Women who qualify for employer matching contributions should make full use of the extra income because it can help close the gender wage gap.
5. Women 401(k) plans can help financial independence
Have you ever dreamed of financial independence? Women 401(k) plans can help.
As a side-note, not all women will feel dependent on their spouse or career for income. There are plenty of successful women in every industry and sector who have built enough assets to live on. You might be one of those!
Still, society can make it hard for women to gain financial independence. A study of 1,147 divorced men and women found that 44% of women report delaying or entirely postponing divorce because they were afraid of being financially destitute (vs. just 11% of men).
And even among career women, financial independence can feel far off. Job dependency, children, and living expenses can make anyone feel as caught in a rat race. Here’s where a woman’s 401(k) plan can help.
The great thing about a 401(k) plan is that it’s in your name alone. Though Federal law automatically designates your spouse as the secondary beneficiary, your 401(k) will stay in your name alone while you’re alive. That’s important because it can help serve as a measure of your contribution within any equitable distribution state.
If this seems like a lot of information, don’t worry. The great news is that help is available. You can talk to a qualified investment pro about your 401(k) today.
Where to find more resources
If you’re looking for even more investment tips, you’ve come to the right place.
That’s because I’ve helped invest client money for over a decade in the same old-fashioned way. And that’s to seek out great companies in great industries that can you can buy at a discount to their fair value. Sounds too simple to be true? Give me a call today, and I’ll show you that it’s still possible after all these years.
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