Women’s retirement planning: invest in your future self
Generating lifelong retirement income is a challenge—and one that’s not shared equally between men and women. With longer average life spans, women are often more at risk of not meeting their retirement income targets. We measure the extent to which a longer life span affects factors that are crucial to women’s retirement readiness.
Women face unique challenges compared to men when planning for income in retirement. One factor that no one has control over is how long any of us will live. Women often face average life spans longer than men, which puts them at a higher potential risk of not reaching their target for income in retirement. Additionally, women face the challenge of potentially taking a career break to have children and are typically more likely than men to give up full-time employment to care for family members. These disruptions may often increase shortfall risk, which is exacerbated by women’s longer average life spans.
Retirement income for women: what is shortfall risk?
In the context of retirement, shortfall risk is the danger of not meeting your income replacement rate, which is the percentage of your income prior to retirement that you want as a monthly or yearly income during retirement. The industry standard for planning purposes is to use a 70% replacement rate. In other words, 70% of your monthly income prior to retirement is the amount of income you want every month during retirement. Achieving this goal is not easy. Yet by understanding the extent to which four primary factors affect shortfall risk, women may be better informed when making long-term decisions:
- How long you’re likely to live
- Start date for contributions
- Contribution rate
- Investment choices
Establishing a base case
We used the following assumptions as a base case against which to measure the effect these various factors will have:
- An accumulation period of 40 years (starting at age 25)
- 10% total contribution rate (5% employee contribution plus 5% employer match)—depending on the terms, a 401(k) plan may have full or partial employer match
- Retirement age of 65
- An income replacement goal of 70% comprising a combination of 35% government pension (e.g., Social Security) and 35% accumulated retirement contributions
- Mortality data for women in the United States
1 Living longer—how may this affect your retirement income?
All other things being equal, our analysis shows that longevity risk in retirement is such that a woman retiring at age 65 will consistently have a higher shortfall risk than a man due to longer average life expectancy. In the United States, a woman at retirement has a 38% shortfall risk; in other words, there’s a 38% probability of not meeting your income replacement target. This is concerning given that it’s based on 40 years of uninterrupted accumulation and a 10% total contribution rate. What if you have a career break to start a family or stop working to care for elderly parents? Any of these circumstances have the potential to increase your shortfall risk.
Due to longer life expectancies, women have a greater risk of income shortfall in retirement
2 Starting date—what effect may this have long term?
When you start accumulating investments for retirement has a significant effect on whether you reach your income replacement target and, therefore, affects your retirement savings shortfall. In aiming to quantify this risk, we analyzed varying outcomes based on different starting ages: 25, 35, and 45.
If you start retirement contributions at age 35, instead of 25, our analysis shows that your shortfall risk is 47%, which is a high number. Starting 10 years later than that—age 45—pushes your shortfall risk up to 61% in the United States, which is significant.
Effects on shortfall risk when delaying investing for retirement
Importantly, this risk remains high even if you ultimately set aside the same total contributions. This is because the early benefits of compounding cannot be caught up later. Consider the following hypothetical scenario:
Susan and Anna both contribute the same amount to their retirement investment—$500,000—and receive the same annual growth rate of 6%. However, Anna delays her start date by 10 years. Although both women’s contributions are the same, Anna’s delayed start means she doesn’t benefit from the early compounding that gives Susan over $650,000 more by retirement.
Case study
Susan |
Anna |
$500,000 total contributions over 40 years from age 25 to age 65 |
$500,000 total contributions over 30 years from age 35 to age 65 |
Growing at 6% per year |
Growing at 6% per year |
End value: $2,050,596 |
End value: $1,396,695 |
Susan’s total accumulation is 47% higher than Anna’s.
Measuring the effects of early compounding
3 Contribution rate—how may this affect your accumulation?
Unsurprisingly, how much you save has a significant effect on your income for retirement. However, when we measure the results of saving 5% more—or less—than the 10% base case, the positive and negative effects are unevenly distributed. For example, saving half of the 10% base rate may double your shortfall risk from 38% to 78%.
However, to potentially cut your risk in half doesn’t require you to double your contributions. Increasing total contributions from 10% to 15% may limit your shortfall risk by more than half.
Achieving a 15% total contribution rate can be a challenge for many people who face a myriad of other expenses, but consider that most retirement plans, such as a 401(k) consist of an employer match. Therefore, 15% total contributions can be made up of 7.5% from you and a 7.5% employer match, which may be a readily achievable goal.
Shortfall risk based on different contribution rates
4 Investment strategies for women—an important pillar in retirement income
We often refer to retirement savings, but a more accurate description is retirement investments. Savings generally suggests putting money aside for a future purpose, but this underemphasizes a critical choice, which is choosing how to optimally help grow your money for the future—in other words, investing.
Investing for retirement requires careful consideration of the options available to help your money grow without taking on unnecessary risk; however, in the context of a long life span, the inability to capture sufficient growth is a significant risk. In our analysis, we looked at shortfall risk in the context of investment choice. Our analysis shows that undiversified, conservative options such as cash or near-cash investments increase shortfall risk to as high as 74%, even higher if you start accumulating your investments later than 25 years old and/or have a total contribution rate less than 10%. Choosing your retirement investments carefully is important, which is why financial advice may be helpful and where options aimed at long-term retirement investing, such as a target-date strategy that changes the asset allocation mix throughout your accumulation journey, may be beneficial. Speak to a financial professional to get long-term financial planning advice.
Investment choice—an important pillar in retirement income
Tackling the gender gap in retirement savings
Women face unique challenges compared to men when planning for income in retirement, especially in relation to the one factor that no one has control over—how long we’ll live. As such, it’s important to be informed about what affects shortfall risk. Time horizon and how much you allocate toward your total retirement contributions will have the largest effect on meeting your income target. But making prudent investment choices is just as critical to ensuring your money is working as hard as you need it to be, especially in the context of a longer life. Investing for retirement is challenging, but it’s not insurmountable. Being knowledgeable about the risks you may face as a woman and working with a financial professional to devise a plan based on personal goals and circumstances is the approach you should consider to help make better financial decisions for the future.
Speak to your financial professional about planning your retirement journey.
Important disclosures
Target-date portfolio at age 25 consists of equities (97%), cash (2%), U.S. Treasuries (1%); at age 65 consists of equities (55%), fixed income (38%), real assets (5%), cash (2%). 60/40 portfolio consists of equities (60%) and fixed income (40%), cash portfolio consists of cash (100%). Data is based on Manulife Investment Management's Multi-Asset Solutions Team (MAST) asset class forecasts, which comprise MAST's expectations of how different asset classes will perform in the future over a 20-year-plus time horizon. Refer below to the list of indexes used. It is not possible to invest directly in an index. Past performance does not guarantee future results. Forecasts are derived using quantitative modeling techniques, which are mathematical and statistical based methods—some of which are widely used in financial markets and some of which are developed specifically by MAST—for analyzing complex financial data. In addition, forecasts include estimates of anticipated economic conditions, including, but not limited to, inflation and interest rates, GDP and currency exchange rates, and the anticipated effects these may have on financial markets and asset prices. There is no assurance that such events will occur, and actual asset class returns may be significantly different from those shown here. This material should not be viewed as a recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy and are not meant as predictions for any particular index, mutual fund, or investment vehicle.
Equities
U.S. large cap is represented by the S&P 500 Index, which tracks the performance of 500 of the largest publicly traded companies in the United States. U.S. mid cap is represented by the S&P MidCap 400 Index, which tracks the performance of 400 mid-cap companies in the United States. U.S. small cap is represented by the S&P Small Cap 600 Index, which tracks the performance of 600 small-cap companies in the United States. EAFE small cap is represented by the MSCI Europe, Australasia, and Far East (EAFE) Small Cap Index, which tracks the performance of small-cap stocks of companies in those regions. Non-U.S. developed is represented by the MSCI Europe, Australasia, and Far East (EAFE) Index, which tracks the performance of large- and mid-cap stocks of companies in those regions. Emerging markets is represented by the MSCI Emerging Markets (EM) Index, which tracks the performance of large- and mid-cap EM stocks.
Fixed income
U.S. investment grade is represented by the Bloomberg U.S. Aggregate Bond Index, which tracks the performance of U.S. investment- grade bonds in government, asset-backed, and corporate debt markets. U.S. long term Treasuries is represented by the Bloomberg U.S. Long Treasury Index tracks the performance of U.S. Treasury obligations with maturities of 10 years or more. U.S. short core investment grade blend is represented by a blend of the Bloomberg U.S. Aggregate 1–3 Year Index, which tracks the performance of the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including instruments with a remaining maturity of one to three years; and the Bloomberg U.S. Aggregate Bond Index tracks the performance of U.S. investment grade bonds in government, asset-backed, and corporate debt markets. U.S. intermediate term credit is represented by the Bloomberg U.S. Intermediate Credit Index tracks the performance of investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets with maturities greater than one and less than ten years. U.S. short TIPS is represented by the Bloomberg U.S. 1–5 Year U.S. Treasury Inflation-Protected Securities (TIPS) Index tracks the performance of inflation-protected securities issued by the U.S. Treasury with maturities between one and five years. U.S. high yield is represented by the Intercontinental Exchange (ICE) Bank of America (BofA) U.S. High Yield Index, which tracks the performance of below-investment-grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market and includes issues with a credit rating of BBB or below. U.S. leveraged loans is represented by the J.P. Morgan U.S. Liquid Index (JULI), which tracks the performance of a specific corporate bond or sector against the subset of the most liquid bonds in the investment-grade market. Emerging markets debt is represented by a combination of the J.P. Morgan EMBI Global Diversified Index, which tracks the performance of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by sovereign and quasisovereign entities, capping exposure to countries with larger amounts of outstanding debt; the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI), which tracks the performance of U.S. dollar-denominated debt issued by EM corporations; the J.P. Morgan Government Bond Index-Emerging Market (GBI-EM) Broad Index, which tracks the performance of local currency EM government bonds.
Real assets
Global REITs are represented by the FTSE EPRA Nareit Developed Index, which tracks the performance of listed real estate companies and real estate investment trusts in developed markets on a free float-adjusted basis.
Cash
Cash is represented by the Bloomberg U.S. Short Treasury 3–6 Month Index tracks the performance of U.S. Treasury bills, notes, and bonds with no more than six months to maturity.
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