It’s complicated. I’m referencing the tug of war that many women face between being active in the work force vs. taking care of family. According to the Department of Labor, today, 70% of women with minor children participate in the workforce. Not surprisingly, a mere three decades ago, the number was nearly half that. In my generation, there exists a silent war between working moms and stay-at-home moms, as many women are quite passionate about their being on one side of the fence. But, perhaps we could stretch this tug-of-war a bit further to the include the boomer generation woman facing difficult decisions about the care of her parents or in-laws as it’s common for aging relatives to need significant financial, emotional and even physical support.
Many of you may be in this exact situation; or perhaps you can see it in your rear view mirror. It seems reasonable to suggest that most women have considered the cash-flow crunch it will cause when they are not in the workforce. After all, going from a steady paycheck to no paycheck at all certainly demands attention. Perhaps, as one mother shared, cable has been eliminated entirely and shopping confined to thrift stores in order to maximize household retirement savings and fund college savings plans. To those of you whom this describes, either present day or in the past, hats off to you for making these sacrifices.
Or perhaps you are someone who has taken time out of the workforce, like my own mother, to care for my very ill grandmother for many years. My mom drove thousands of miles, back and forth, to take my grandmother to doctor appointments, sit with her in countless hospital rooms and ensure she received the best care possible. These years were not easy for our family.
Each family situation revolves around a unique set of circumstances, values and preferences; my intention is not to pick a side. Rather, it is to bring to light one of the first financial challenges that women face when looking toward their retirement years.
On day one of leaving the workforce, a woman is discontinuing her contributions to Social Security. Since Social Security benefits are based off of the 35 highest years of earnings and contributions, the woman who doesn’t contribute to Social Security for a year (or a number of years) is most likely foregoing a higher Social Security benefit down the road. A lower Social Security benefit will impact her retirement income indefinitely. In retirement, personal savings (and a pension plan, for those lucky enough to still have them) need to fill the gap between Social Security benefits and living expenses.
In addition to the Social Security dilemma, someone who is not engaged in the workforce has fewer options regarding how much and to what types of retirement plans she can contribute toward in order to help bridge the income gap. Of course, anyone can save money to an after-tax account regardless of her employment status; however, retirement accounts offer tax deductions and tax deferrals for decades or potentially throughout her lifetime, depending on the type of account. Furthermore, a woman who is out of the workforce is likely missing out on some form of employer match (“free” money) to her retirement contributions. These seemingly small benefits can make a dramatic difference with regard to her overall return net of taxes and her overall account balance on day one of retirement.
Again, I’m not suggesting that everyone needs to work. Women need to make the decisions that are best for them and their families. Women who either choose or are forced to leave the workplace at some point in their career, however, should be attentive, cautious and creative with their lifetime income planning. We at Woodward Financial Advisors have helped hundreds of women plan for this exact thing.”
This post is the first in a series on financial planning for wise women. As you consider it, I hope you will heed the words of Nora Ephron who insisted, “Above all, be the heroine of your life, not the victim” and take a proactive, heroic stance to your situation. If you’re looking for a partner as you navigate these decisions, we’re here for you.