5 Steps Women Can Take to Improve Their Retirement Readiness

Editor's note: This article is part of our Women and Investing special report.

Among researchers, there’s an active debate about whether there’s a retirement crisis in the United States. Despite sobering statistics about average 401(k) plan balances, researchers point to Social Security’s high level of income replacement for lower-income workers as evidence that undersaved workers won’t run out of money during retirement.

Yet one aspect of retirement preparedeness is a settled matter: Women are in worse shape than men on nearly every important metric.

The reasons are manifold, but a few factors loom large. Women have lower lifetime earnings than their male counterparts, due to both wage inequality and the fact that women are more likely to stop working or maintain a reduced schedule to devote time to caregiving for children, elderly parents, or both. The pandemic has had a disproportionate effect on women's finances, as many women have been forced to trade paid work for caregiving obligations. Lower lifetime earnings translate into fewer opportunities to fund retirement accounts.

In addition, women must stretch those smaller average balances over a longer time frame in retirement, as 65-year-old women outlive their male counterparts by two years, on average. That convergence of lower retirement balances and a longer retirement period helps explain why women are much more likely than men to be poor in retirement and to rely exclusively on Social Security for their living expenses. And thanks to those lower lifetime earnings, women's Social Security checks are also smaller than their male counterparts'.

There’s no easy fix for the problem, but women should consider the following steps to help stave off a shortfall.

Maximize Contributions Before, During, and After Work Disruptions Much of the gender gap in lifetime earnings, and in turn retirement savings, owes to women reducing their paid work schedules or quitting work altogether to devote time to unpaid caregiving for children or elderly parents. Women are much more likely than men to cut back on paid work or quit altogether to shoulder caregiving responsibilities for children or other family members.

Those life decisions are about more than money, and women don't always have complete control over their employers or when their caregiving responsibilities will begin or end. But to the extent that it is possible, women who anticipate that their work trajectories could be affected by caregiving should prioritize employers with family-friendly policies such as paid parental leave and flexible work hours. As roughly 60% of family caregivers are employed, companies are recognizing the importance of policies that support them. The number of companies offering paid family leave has increased substantially in recent years.

The data also show that women's earnings tend to peak earlier than men's, no doubt in part because of caregiving responsibilities for many. That accentuates the merits for women of maximizing contributions in the early years of employment, when they can best benefit from compounding, and taking maximum advantage of retirement savings opportunities in those early-to-peak earnings years.

Married women who aren’t earning a salary can contribute to an IRA provided their spouse has enough earned income to cover the contribution. Doing so can help minimize the retirement-savings shortfall that can accompany work interruptions/reductions.

In addition, women who have reduced or stopped working to care for children, elderly parents, or both have the option to play catch-up, provided their caregiving obligations eventually cease and they have the extra income to contribute at a high rate. If they re-enter the workforce later in life, they may have the opportunity to contribute more to their retirement accounts during the empty nest years; additional catch-up contributions to IRAs and company retirement plans such as IRAs are available to people over age 50, and health savings account catch-up contributions are available after age 55.

Take Advantage of Automated Advice Research on women's investing behaviors is all over the map: Studies have pointed to women investing more conservatively than men, trading less, being more patient, or being more goals-oriented. Other research indicates that once you control for income, women's investing behaviors are very similar to men's.

One healthy trend in the mix appears to be the dramatic uptake of target-date funds in 401(k) plans, for both women and men. Using such accounts helps ensure that women's asset allocations are appropriate given their proximity to retirement, and has helped bring women's asset allocations more in line with men's. For example, Vanguard's 2020 "How America Saves" report, featuring data on 5 million 401(k) participants, indicates that male and female participants' equity allocations are roughly aligned.

While many investors take advantage of automatic investments through their company retirement plans, investments into IRAs and taxable accounts can be readily automated, too. Using a multi-asset product like a target-date fund takes the guesswork out of how to invest the funds.

Work Longer Many factors affect how long we'll work--lifestyle and health considerations, as well as being able to stay employed and caregiving obligations. The fact that our retirement dates may be out of our control is why Morningstar contributor Mark Miller has referred to working longer as "a worthy aspiration, not a retirement plan." And research from Morningstar Investment Management head of retirement research David Blanchett indicates that retirees who expect to work longer--past the traditional retirement age of 65, for example--are often unable to do so. Our retirement dates are less in our control than we might like to believe.

That said, the financial (and possibly other) benefits of working longer are undeniable: Additional retirement-plan contributions, delayed portfolio withdrawals, a shorter drawdown period, and delayed Social Security can all help bolster the viability of a retirement plan. The benefits of delaying retirement are especially great for women, in that interrupted work trajectories (for caregiving, see above) and longer life expectancies compound the stresses placed on retirement assets. For women hurtling toward retirement shortfalls, delaying retirement will be the single-most financially impactful decision they can make. That argues for maintaining work skills through investments in continuing education, being mindful of the incidence of ageism and staying alert to combat it, and making investments in physical health.

It’s also worth noting that “working longer” doesn’t necessarily mean sticking it out in a job that makes you miserable. If you can tick a couple of the working longer benefits outlined above--for example, delaying Social Security and portfolio withdrawals even if you aren’t earning enough to make additional retirement plan contributions--that can still be incredibly impactful for your plan.

Make Smart Social Security Claiming Decisions Social Security plays an outsize role in women's retirement plans: It composes 47% of income for women age 65 and older, whereas it is 32% of income for males who are 65 and above. Women's heavier reliance on Social Security, combined with the fact that women live longer than men, on average, accentuates the value of maximizing the lifetime value of Social Security for women. Women who expect to have longevity on their side have every reason to delay Social Security claiming to enlarge their eventual benefit. And married couples should focus their decisions on maximizing lifetime income over both partners' lives. For women who will claim a spousal benefit (because half of their partners' benefits will be higher than their own benefit), that argues for the higher-earning spouse delaying Social Security, if possible, to maximize the eventual benefit for the surviving spouse.

Lay a Plan for Healthcare Costs Because of their longer life expectancies, women have higher lifetime healthcare outlays than men and a greater need for paid long-term care. Women are often the caregivers for their spouses; when their spouses predecease them, they require paid long-term care at a greater rate.

That accentuates the virtue of maximizing retirement savings, of course, but women can take additional steps to ensure that high healthcare and long-term-care costs don’t imperil the sustainability of their retirement plans.

Health savings accounts can be valuable as a long-term investment vehicle for women who would like to raise assets for their inevitable healthcare outlays. In contrast with retirement savings vehicles like IRAs and 401(k)s, HSAs enjoy tax breaks every step of the way: Pretax dollars go in, money compounds on a tax-free basis, and qualified withdrawals for healthcare expenses are tax-free, too. In contrast with assets in a flexible spending account, HSA assets can be invested in long-term assets like mutual funds and exchange-traded funds and roll over from year to year. Worst-case scenario and someone oversaves in an HSA--the withdrawals for non-health-care expenses after age 65 are treated like traditional IRA withdrawals, taxed at the investor’s ordinary income tax rate.

In addition, greater long-term-care usage suggests that women should be especially thoughtful about developing a long-term-care plan. Assets in health savings account can also be used to pay long-term-care insurance premiums or out-of-pocket long-term-care expenses.