Personal Finance

Why Women’s Retirement Account Balances Are Trailing Men’s—Despite Better Saving Habits

When it comes to 401(k) savings, women are doing better than men in every way — except their account balances. That’s according to a recent study examining the different ways male and female savers treat their workplace retirement plans. Not only did women demonstrate better savings habits than men, but they also enrolled in their plans at higher rates and contributed a bigger cut of their paychecks. However, men had 44% more savings in their accounts which the study concluded had less to do with saving patterns than with income inequality. Among the study participants, men’s incomes, on average, were 33% higher than women’s.

This tracks with other research on gender income inequality in recent years. In fact, according to Pew Research, the gender gap has remained relatively stable in the United States over the past two decades. In 2022, women earned an average of 82% of what men earned. This wage gap translates into a savings gap and can be detrimental for women whose average lifespans typically outpace those of their male counterparts. While the CDC reports that life expectancy for both genders declined slightly due to the pandemic, in 2021 the life expectancy for women was 79.1 years, versus 73.2 years for men. The longer you live, the longer you will need income to support your lifestyle and healthcare needs.

Women are more likely than men to retire earlier than planned or to reduce their hours to accommodate the care needs of their children, spouse or aging family members. That can hinder the ability to maximize savings during peak earnings years leading up to retirement. It’s critical to take full advantage of workplace benefits, and to work with an independent financial advisor to put a comprehensive financial strategy in place for optimizing income in retirement. Below are five ways to help turbo charge your retirement savings, starting in 2023.

1. Contribute the maximum to retirement plans

Participants in employer plans, such as a 401(k) or 403(b), can contribute $2,000 more this year. In 2023, the maximum contribution amount rose to $22,500 from $20,500 in 2022. Those over age 50 can contribute an additional $7,500 in catch up contributions in 2023, for a total of $30,000 for the year.

Maximum contribution amounts for individual retirement accounts (IRAs) also increased in 2023, and the income ranges for determining eligibility to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver’s Credit have been expanded. However, since the IRA catchup contribution limit for individuals aged 50 and over is not subject to an annual cost of living adjustment, it remains unchanged at $1,000. Eligible individuals can contribute $6,500 to an IRA in 2023, and those over 50 can contribute an additional $1,000 in catch-up contributions for a total of $7,500.

While periods of high inflation can make it hard to find extra money to set aside for long-term goals, keep in mind that pre-tax contributions to a traditional 401(k), 403(b) or IRA may lower the amount of your income that is subject to taxes, effectively freeing up more money to work for you instead of Uncle Sam.

2. Harness the power of compounding

The earlier you begin saving, the greater the potential benefits, thanks to the power of compounding. Compounding takes place when investment earnings from capital gains or interest are reinvested to generate additional account earnings over time. Your money has the potential to grow even faster when invested in a qualified retirement plan, such as a 401(k), 403(b) or IRA, due to tax-deferred compounding. That’s because earnings generated in qualified plans are not subject to taxes until they’re withdrawn, usually in retirement when you may be in a lower tax bracket.

3. Take advantage of matching contributions

Many employer retirement plans offer matching contributions, which can exponentially increase the value of your retirement plan assets over time. Make sure you’re contributing enough each year to capture the full match so you’re not leaving free money on the table. If it’s not possible to contribute at match level or greater right now, consider taking advantage of automated annual deferral increases to get closer to your retirement savings goals. Automated deferral programs generally increase your deferral amount by 1% or more annually. However, you can also manually increase your deferral percentage at any time, such as when you receive a raise. You can elect to defer up to 100% of your salary or wages each year, up to the plan’s maximum contribution limit as determined by the IRS.

4. Take advantage of new opportunities to save more

Catch-up contributions enable people over age 50 who have delayed saving or haven’t started yet, to “catch up” as they pursue their retirement goals. The SECURE 2.0 Act of 2022 introduced two significant changes for catch-up contributions. First, effective in 2024, all catch-up contributions for individuals earning more than $145,000 per year (indexed) must be made on a Roth, or after-tax basis. (This does not apply to SIMPLE plans.)

Second, beginning January 1, 2025, individuals ages 60-63 will be allowed to make catch-up contributions to their workplace plan of up to $10,000 or 150 percent of the standard catch-up contribution amount for 2024 or whichever is greater. The $10,000 amount will be indexed to inflation each year starting in 2026. For SIMPLE Plans, the contribution limit is $5,000 or 150 percent of the regular SIMPLE catch-up ($5,520 in 2023), whichever is greater.

What’s the difference between a traditional and Roth IRA? In a traditional IRA, contributions are typically excluded or deductible from taxable income subject to certain income limitations. Assets within the account grow tax-free and distributions are taxed at the ordinary tax rate. Roth IRAs contributions are made with “after-tax” dollars. Account assets grow tax-free, and qualified distributions are not taxed.

5. Consider a backdoor Roth contribution

Previously considered a loophole, the backdoor Roth contribution has now been formally approved by the IRS and is a way to circumvent the income limitations on Roth contributions. Subject to a strict order of operation, a non-deductible (“after-tax”) contribution is made to an IRA account and then rolled over to a Roth IRA. Since the contributions then have a tax-basis as no deduction was taken, the Roth conversion is a non-taxable rollover. To meet the strict rollover rules, it is recommended that the IRA accounts used for the backdoor Roth contributions are used exclusively for that purpose and not commingled.

Find your financial freedom

While these tips can help you maximize your retirement savings, following a disciplined investment strategy and meeting regularly with your advisor are also important ways to help you stay on course toward your goals. Whether you’re just starting out, have invested for years, or are already in retirement, a trusted advisor can help you find the financial freedom you seek. Ensuring your advisor is a fiduciary, and you’ll find an advocate for you and your goals. This trusted source will work with you to refine and adjust your strategy whenever you experience a major change in your life, such as a new job or promotion, birth of a child, change in marital status or when you’re approaching a life milestone, such as retirement.

To learn more about managing your finances during periods of change, download our complimentary guide: Investing for Women.

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