As we celebrate International Women’s Day, I was disheartened to read, in this Mercer report, women experience a 30% retirement savings gap. The report examines 14,000 group retirement plans and highlights recently retired women have an account balance that’s $30K less than their male counterparts. In sharp contrast, recently retired men leave the work force with (on average) $100K in their work pension plan; women, a paltry $70K.
Sandwiches, Rockets & Promotions
It’s not rocket science to pinpoint the roots of the gender discrepancy in savings rates: generally, women earn less than men and they’re entrenched in the sandwich generation. They’re more likely to take “time off” from their careers to manage the twin responsibilities of elder and childcare. Also, a 2019 McKinsey & Company report cites women are 76 percent less likely to be promoted to manager and 64% less likely to be promoted to vice president.
The inability to save for our future is a genuine problem; it increases our risk of outliving our retirement savings. However, our financial fate is not predetermined. We do have the opportunity to take control of our finances.
Five Tips to Shift Your Financial Fate
- Live beneath your means and track your spending. Be mindful about where and how you spend your pay cheque. Traditional wisdom suggests a 10% savings rate, compounded over 20 to 30 years, should put you in good stead for retirement.
I would take it one step further. Analyze your fixed and discretionary expenses for a couple of months. Track every (from incidental trips to the grocery store to takeout meals) bit of cash that flies out of your digital wallet.
Patterns will emerge: can you trim your expenses in ways that won’t meaningfully impact your lifestyle/ happiness? Are there areas you would like to contribute more to (i.e. your retirement) each month?
- Factor your retirement savings into your budget.
Avoid the mistake of paying all your important bills (i.e. mortgage/ rent, electricity, heating etc.), enjoying your splurge money, and then surveying the fiscal crumbs to invest in your retirement savings.
- Your partner earns the majority of the pay packet: set-up a spousal RRSP.
Here’s how they work: your spouse invests money into your RRSP (you get the $); they earn the tax credit (lowering their income taxes). Word of warning: be careful with withdrawals; there are tax implications.
If you withdraw this money within three years of your spouse’s deposit, he/she will have the earlier tax credit reversed and find themselves paying a hefty tax bill. That aside, spousal RRSPs are a solid tactic to split income now and in retirement.
- Single? Create a cushy landing for Future You.
Take a good, hard look at your income. How much do you think you’ll need (60%, 70%, maybe 80%?) in retirement? How old are you now? How many years until you retire? Use a calculator to dig into the number you’ll need to retire comfortably.
Reverse engineer your target number; build a plan to save and invest enough to meet your goal. A fool-proof way to achieve a big goal small: set-up automatic withdrawals from your primary bank account to your high-interest savings account. Then, on a monthly, quarterly or semi-annual basis, transfer this money into your retirement investment account.
- Build an emergency fund.
Conventional wisdom suggests saving three to six months of your salary for emergencies. Here’s a calculator to help estimate your emergency savings target. As you build toward this target, consider opening a low interest line of credit (LOC).
Be careful with your LOC; it’s not free cash. In a pinch, it helps you avoid outrageous credit card interest (or paying interest on your interest, yes that’s how it’s billed on recurring balances) or dipping into your RRSP.
Avoid the temptation to rob your RRSP to access cash: it’s like knee-capping your present and future self. You’ll be subject, at minimum, to a bump in your take home salary (aka pay more tax the next time you file your taxes) and immediate withholding taxes (except for withdrawals for the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP)).
Most damaging of all, you’ll lose out on earning longterm compound interest, DRIPs and/ or capital gains within your investments.
If all of this seem too hard, too time consuming, too complicated—it isn’t. Believe me. The days, especially now, may seem long, but the years truly are short.
There’s no better time than today to honour your future self. Happy International Women’s Day!
Pound Wise & Penny Prudent 