Equal pay for men and women has been the law since 1963. Yet, well into the next century, women with similar education, skills, and experience are still paid less than their male counterparts. So, what is the wage gap between men and women? On average, American women working full-time are paid only 82 cents to every dollar a man is paid, according to recent statistics by the Pew Research Center.
A portion of the gap has been attributed to the “Motherhood penalty”—the time off and breaks many mothers take to raise a child. This certainly accounts for some of the pay discrepancies and is proven when you look at the women’s wage gap between those who remain single without kids and single mothers. Those without kids tend to have the most wealth of all the unmarried people, women or men. And yet, single women without kids still end up with 29% less wealth than never-married men. So, it can’t all just be due to having children—or not. When you factor in race, the wage gap between men and women becomes even wider.
Why Is There a Gender Pay Gap?
It’s a question that can’t be answered in full here, but in short, it’s due to a combination of reasons. First, there’s the bias against women in the workforce, where women’s labor has historically been undervalued. As the U.S. Department of Labor notes, one of the biggest contributors to the disparity is that women are more likely than men to work in lower-paying jobs and occupations, earning less with fewer benefits. You might imagine that education would play a part in making the playing field more even. Yet, statistically speaking, women have more education than men, and a significant wage gap is still seen at every level. In fact, women must complete one degree higher to be considered for a salary equal to that of a man with less education.
As mentioned, there’s the “Motherhood Penalty," where women are far more likely than men to take time off from their jobs to focus on parenting and caregiving. All that time adds up financially to the point where a woman will have earned $1,055,000 less than a man by retirement. Because women earn less, they're unable to save and invest at the same rate as men. The gender wage gap in the U.S. even has ramifications well into retirement. Just imagine how those additional wages could boost a nest egg.
Gender pay gap statistics show that women's Social Security benefits are also affected. According to the AAUW, since lifetime earnings and work history influence benefit payments, women generally receive far less than men. In 2019, the average annual Social Security benefit for women 65 and older was approximately $13,505, while their male counterparts brought in about $17,374.
All these factors become compounded when you consider that, historically, women have been more reliant on their Social Security benefits than men. The Social Security Administration (SSA) notes that women at age 65 are expected to live about 21 additional years, compared to 19 years for men. Women represent 55.3% of all Social Security beneficiaries age 62 or older and about 64% of beneficiaries age 85 and above.
How to Adjust for the Wage Gap When Planning Your Retirement
One doesn't have to be a math whiz to calculate these forces' immense impact on women's retirement savings. The good news—and there is good news—is that legislation, changing norms, and the slow march of time are producing incremental change. Beyond forces out of the control of most women, there are marked steps that can be taken now to help mitigate the effects of the wage gap for retirement.
1. Find Ways to Accelerate Savings
There are certain savings options women should capitalize on whenever possible. The first is to take full advantage of employer-matching retirement contribution programs when offered, as this is essentially "free money" in a tax-efficient savings vehicle. Even if saving is challenging, seeking to contribute at least the amount that will make them eligible for the match is advised. This incremental amount won't make up for the wage gap, but it's a start.
Other opportunities that can help accelerate savings include:
- Additional catch-up contributions to a retirement plan that can be made over the typical limit if you’re 55 or older
- Roth conversions in low-income years can provide tax-exempt savings and tax-free withdrawals later
- Increase savings contributions once major expenses are behind you (e.g., child’s college tuition)
2. Invest for Growth
Women generally have a different investment strategy compared to their male counterparts. Notably, they tend to be more conservative investors, preferring to put their wealth into real estate, cash, or bonds while steering clear of equities. While that may help manage risk from volatility in the stock market, it puts women at risk of outliving their savings.
On average, women live longer than men and are more likely to need long-term care services for longer periods of time. So, more money is needed to support their longevity. And while it may conflict with more conservative risk tolerances, women should consider a significant allocation of stocks in their portfolios—maintaining that allocation well into retirement years. It can be difficult to find the right balance between risk tolerance and investing for the growth needed to sustain you through retirement, which is why it’s a good idea to discuss any financial plan with a professional advisor.
3. Have a Strategy for Claiming Social Security Benefits
Social Security is a significant retirement planning asset with the potential to exceed a million dollars in accumulated benefits over one's lifetime. Strategies for claiming benefits involve several complex decisions requiring financial projections and knowledge of Social Security rules and regulations. If married, divorced or widowed, there are hundreds of claiming options beyond just one's earnings history.
4. Start Saving and Investing Early
The earlier a savings plan is implemented, the more impactful compounding interest can become. Simple math shows that a 20-year-old person investing $5,000 per year for ten years, earning a 7% rate of return each year, will have more money at age 65 than another who starts investing with the same amount at the same rate of return beginning at age 30. This is true even when considering the ups and downs of the market and other mitigating factors. Starting early makes a dramatic difference.
5. Reduce Your Income Taxes
This one is simple—the less paid in taxes, the more available for savings. However, tax planning can be complicated, with much to consider. Is it a deduction? Is it a credit? Is the credit refundable? This is an area where a subject matter expert is highly suggested. While working with a tax professional can come at a cost, it may be well worth the investment if it decreases the amount of taxes paid annually.
6. Stick With Your Gameplan
Recent trends show how women investors are changing the game, with better investment habits, increased proportions of wealth, and outperforming their male counterparts over the long term. Simply put, women invest less impulsively than men, which has been shown to work in their favor over the long term with higher overall average returns. Once you’ve mapped out the components and goals of your retirement plan, working with an expert to help you execute that plan and stick with it is a smart way to compound your success.
Moving the Needle
The good news is that the landscape is changing. The gender wage gap in the U.S. is evening out. But until true pay equality is the norm, women must remain particularly vigilant regarding their financial plans—both during working years and retirement. Collaborating with a knowledgeable financial advisor can help you determine which strategies may be best for any unique situation.
And if you’re still looking for more information on how women can more effectively plan for retirement, please watch the recording of our webinar, Retirement Planning for Women: 6 Critical Steps to a Confident Future, available to view on-demand.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
