It's time to talk about the gender gap
01st June, 2016
It’s a home truth that Irish people are not saving sufficiently for their retirement income needs and the statistics show that a pension gap exists between women and their male counterparts, in terms of pension coverage and contributions to existing pension schemes.
But, the fact is that women may need to contribute significantly more than men to their pensions to have an equal income in retirement.
The reasons for this can apply to men also, but on the grander scale research indicates that these issues have a greater general impact upon women;
Women typically live longer than men and so need a larger pension pot to be able to support their income needs in retirement. Actuarial assumptions typically suppose that a woman who retires at age 65 will live 3 years longer than a man who retires at the same age.
Reduced Working Hours
Women tend to remain the primary care givers to children and aging family members, moving in and out of this role throughout their lifetimes. Reducing working hours can reduce the capacity to contribute to a pension. This is compounded by the loss of growth that would have accumulated over the years.
Impact of off-ramping on earnings power
Many women take an off-ramp at some point in their career, taking time out of the workforce to care for others. The more time a woman takes out, the more dramatic the decline in her future earnings potential when she decides to return to work. In an educated workforce where constant upskilling is a requisite the cost of timeout can add up. The Centre for Work-Life Policy estimated that taking 1-2 years out of the workforce can decrease earnings potential by 14% and an absence of over 3 years can reduce earning power by almost 50%. (Source: “Off-Ramps and On-Ramps Revisited”, CWLP June 2010).
Say for example, we compare Matthew and Jane, both 25 year old young professionals with long term successful careers in front of them. Both start out on the same salary at the same age, with their salaries increasing by 4% year on year, and both contribute 15% of every pay check to their pension invested in the same moderate risk strategy achieving a return of 6% per annum. They would like to have 2/3rds of their final salary as income in retirement at age 65. When planning for retirement, the fundamentals remain the same for both Matthew and Jane – save an adequate amount during working years, and invest wisely so these assets can provide an adequate income in later years – but Jane may face the unique challenges we have discussed.
Equal is not always equitable
In reality, the practicalities and sums may work out a little differently – just adding longevity to the equation means Jane has to save more to be able to meet her income needs for her longer life expectancy. A further 1% pension contribution (a total of 16%) during Jane’s working life is required to meet the additional 3 years income requirement.
This is amplified if Jane decides she would like to ‘off-ramp’ at age 30 to be able to take care of her young children for a 5 year period. For example, let’s assume Jane significantly reduces her working hours resulting in a salary reduction of 50%. She makes 15% pension contributions of her revised paycheck and then goes back to work full-time at the end of the 5-year period on the same salary as before she reduced her hours. Compared to Matthew who has taken no time out Jane’s salary is now 20% lower than Matthew’s at the age of 35 attributed to the off-ramping impact on her earnings potential. In this case, to make up for this impact we calculate that a 20% pension contribution throughout all her 40 year working life is required for her to be able to meet her financial objective, i.e. to maintain an income of 2/3rds her salary in retirement based on her life expectancy. That’s a whole 33% more than what Matthew has to contribute over his 40 year working period i.e. Matthew contributes 15% over his working life while Jane must contribute 20% to essentially put them on an even keel going into retirement.
The maths of this scenario is exacerbated if Jane decided she wanted to cease working entirely for a period, therefore ceasing pension contributions altogether.
This is a simple scenario, excluding any tax considerations and revenue requirements, but it might not be that far from home for many working families. Personal considerations likely take priority when families make decisions in regards to care-giving and work-life balance, but the financial implications of any decision should be taken into account.
Avoiding the situation of not having enough saved to meet your goals in retirement requires careful and timely planning. We recommend taking the first steps on this journey by discussing the balancing act between your finances and objectives with your financial advisor to devise a pre-retirement plan.
Figure1: Making things even
Pension contributions, as a percentage of current income, required to meet income needs in retirement.
This is for illustrative purposes only and does not take into account the personal circumstances of any individual. You should seek advice from your pension adviser.