Every company's matching methodology and vesting schedule may be slightly different, so check with your employer to understand how your specific 401(k) matching and vesting works. This is especially important if you're thinking of changing employers in the near future.
Worldwide, women are living six to eight years longer than men, which means our retirements are on average longer, too. Despite earning less than men thanks to the gender wage gap, data suggests that working women have gotten the memo that saving for retirement is a critical piece of overall financial health. They are banking more money for this stage of their lives than ever before.
Recent data released by Fidelity showed that women make up 40% of the investors in its 401(k) platform and a whopping 70% of its 403(b) platform.
Further, despite the economic instability and massive unemployment numbers of Covid-19, Fidelity found that the average 401(k) savings rate for women was at a record 9% in 2020, up from 8.7% in 2019. Women using a 403(b) platform similarly increased their savings rate to a record 7.6%, up from 6.2% in 2019.
This is all good news. However, for women who are new to or re-entering the workforce or who may be planning for their retirements after a divorce or the death of a partner, or as a single woman, learning exactly how to effectively save for retirement can be a tricky road to navigate.
How much exactly are you supposed to save while having enough left over for daily essentials and emergencies? It's tough to know because you don't know how long you'll be retired or what your retirement lifestyle will cost. So, here's our best advice:
Calculate how much you'll spend in each year of retirement.
According to the Bureau of Labor Statistics, people spend about 25% less in retirement than they do in their working lives. Following this guideline, calculating how much you'll need to save in retirement is a relatively simple calculation.
Here's how the math works: If you earn $100,000, you probably net $70,000 after taxes. If you're living comfortably on that, including saving at least 10% of your income, you're probably spending around $60,000 per year.
If you're going to spend 25% less in retirement, that would come to around $45,000 per year, in today's dollars.
How much do you need to save to get that much in retirement?
As the saying goes, $1 million doesn't go as far as it used to. But retirement experts say you can spend 4% of your savings and never run out of money. If you have $1 million, 4% of that equals $40,000 per year.
With the possibility of spending up to 30 years in retirement, you may need every cent of that money. You won't need to accumulate $1 million in retirement savings because you will likely get some Social Security money.
What should you do if you don't earn that much?
If you earn $50,000 a year, you may net around $40,000 after taxes and deductions and should try to put away 10%, or $5,000/year. Over a 40-year career, you'd have saved $200,000, which, if invested to achieve a modest 6% average annual growth rate, could be worth nearly $800,000 by the time you retire. That, combined with your Social Security payment, should allow you to have an income that's comfortable in retirement.
No matter whether your annual income is $30,000, $60,000, $100,000, or even more, the key to building a secure retirement has to do more with what you don't spend than what you earn. If you earn less or are starting to save later in life, focus on saving a larger percentage of your income each year, and making sure you salt that cash away first.
How do you save what you'll need in retirement?
There are several ways to set aside the money you'll need to retire comfortably. Here are three options:
- Pay down your debt.
Saving for retirement means having a plan to pay down all of your debt as quickly as possible. Once your debt is paid off, you can direct more of your money to savings and retirement accounts.
- Learn how your company's retirement plan works.
Every company's matching methodology and vesting schedule may be slightly different, so check with your employer to understand how your specific retirement plan matching works. Don't leave money on the table: Some companies offer dollar-for-dollar matching while others operate on matching only a portion of what you contribute, up to a certain percentage of your salary (for example, $0.50 to every $1 you contribute to your 401(k).If your company offers a match, be sure to invest part of every paycheck to get the full matching benefit of your 401(k). This is especially important for women, who tend to retire with two-thirds less money than men, despite living longer. Just be careful not to exceed the annual limit ($19,500 in 2020 and 2021, with a $6,500 catch-up contribution available to those age 50 and older).Finally, if you leave your employer, take your retirement funds with you. Roll them over to a regular IRA, where you can directly control the investments.
- Aim to save at least 15% of your pre-tax income each year.
Your income will hopefully increase over your working life, but if you're earning even $50,000 per year, saving 15% means you're putting away $7,500 per year. Assuming your investment makes an average return of 7% over 30 years, you'll wind up with nearly $800,000. Combined with Social Security, you should be able to duplicate close to your annual income in retirement.