Career Breaks Contribute to Retirement Savings Shortfall for Women

New research suggests that even though the overall financial wellness gap between men and women reduced to 8.9% at the end of 2015, women still face particular challenges that make it increasingly difficult to save for retirement.

Financial Finesse’s annual Gender Gap in Financial Wellness report shows that although women have been making significant strides in improving their financial behaviors, they are still more likely to have earnings gaps in their careers, live longer than men, and face higher lifetime health care costs, making saving for retirement particularly challenging. 

Liz Davidson, CEO and founder of Financial Finesse, says, “Although we assume pay parity for the typical 25 year old, there is a 28% gap in the additional retirement savings needed to cover estimated retirement expenses primarily due to women’s greater life expectancy.”

If you add to that a career break, the gap becomes even greater. The researchers note that women are still more likely to become caregivers or stay-at-home mothers. Because of compound interest, women who take these breaks earlier in their careers would have to save more money in order to sustain the same level of spending at age of 65.

Financial Finesse identified the gap between women who remain in the workforce their entire careers and women who take breaks for such events as raising children, taking on passion projects that provide little to no pay, or caring for aging parents. According to the study, women who take breaks early in their careers face a potential retirement savings shortfall of up to $1.3 million dollars.

Researchers calculated that the average 25-year-old woman who plans to take a break in her 30s should save about 25% of her income to stay on track for retirement at age 65. Compound interest also explains why employees who put away a higher percentage of their savings away for retirement early in their career are mathematically more likely to retire comfortably even if they decide to cut back on savings later in their careers.

This makes saving early for retirement especially important for the female Millennial. This group, defined in the report as being younger than 30, is the furthest behind when it comes to retirement saving. The paper notes that only 16% of these women say they’re on target to meet their retirement goals. Moreover, one-third are living beyond their means and one-fifth are not contributing enough to their retirement plans to receive the full amount of their employers’ matching contributions.

NEXT: What Can Employers Do

In its research, Financial Finesse points to the absence of affordable, high-quality child care as a major reason why several women leave the workforce, particularly in lower-income jobs. The firm suggests that on-site or subsidized childcare can benefit these women. In addition, it references a study which found 48% of employees with access to child care subsidies through work were more likely to stay.

The research also emphasizes the importance of employer-sponsored financial wellness programs. The report found that the biggest financial wellness gender gaps were largest when it came to money management and investment confidence.

The paper refers to the difference in approach to investing as a “confidence gap.” It finds that women typically would not report feeling confident about investment decisions, even when they had a particularly good year, unless they understand how and why outcomes turned out the way they did. The paper notes, “Women are more likely to feel more confident about their financial decisions when they have done their homework and understand complex terms and choices. Workplace financial education efforts should emphasize hands-on learning that helps change financial behavior and increases financial confidence in order to achieve real world results.”

According to the research, women are more likely to accept financial education and coaching provided by their employers.   

The research also points that boosting a Millennial employee’s financial wellness score by just one point through modest behavior changes like opening a small emergency fund or paying down debt can boost long-term retirement savings by 15%.

Because the financial wellness gap is largest for those younger than 45, Financial Finesse recommends “targeted educational offerings” that focus on areas women in this demographic prioritize such as cash and debt management.

The research uses data based on the analysis of 17,327 financial wellness assessments completed on January 1, 2015, through December 31, 2015. The research report is here.