How much do you need to save for retirement?
Ask any financial adviser and you’ll get a standard answer: it depends. What you might not expect to hear, though, is that gender is one of the things it depends on.
There are two main reasons for this. One is biology. Women tend to live longer than men, meaning female savers have more years of retirement to cover.
Then there’s society. Women still earn less than equal pay for equal work. In Canada, the pay gap has been hovering around 88 cents earned by women for every $1 earned by men. A lower income means less money is available for saving and earning investment returns.
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Income disparities plus longer lifespans add up to significant nest-egg inequality. To put a number on it, Global News asked Ilana Schonwetter, investment advisor at B.C.-based BlueShore Financial, to do the math.
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Meet Joe and Jane Canuck
Let’s look at nest-egg inequality through a hypothetical example. Imagine Joe Canuck, a Canadian man who makes $80,000 a year and starts saving 10 per cent of that for retirement at age 30. For simplicity, let’s say Joe’s income remains steady as does his savings rate. Joe will set aside $8,000 every year until age 65. Assuming he invests all of that money inside a Registered Retirement Savings Plan (RRSP) with a rate of return of 5 per cent, he’ll end up with roughly $758,000 by the time he hits 65, according to Schonwetter. These savings consist of $280,000 in contributions and around $478,000 of investment returns.
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Based on a $758,000 nest egg and life expectancy of 86, if John keeps investing the way he always has, he can safely take out the equivalent of an inflation-adjusted $3,900 a month throughout his retirement, said Schonwetter.
But what if Joe was Jane?
Let’s re-run that example with a hypothetical female Canadian, Jane Canuck. In an identical job, Jane brings home only $72,000 a year. If she saves 10 per cent, that works out to $7,200 in annual retirement savings. But since Jane had a couple of kids, she stopped her contributions for three years while on maternity leave and transitioning back into the workforce. Assuming the same 5 per cent return, she crosses the retirement finish line at 65 with $568,000 in her RRSP, consisting of around $230,000 in contributions and around $338,000 worth of investment returns.
“Lower earnings and a shorter working life due to maternity leave cost Jane $190,000 in savings,” Schonwetter said .
But Jane will also have to stretch those dollars over a longer period of time. If she lives to age 90, she can withdraw $2,550 per month indexed at 2.5 per cent inflation for 25 years, still assuming a 5 per cent rate of return, Schonwetter said.
Bottom line, Jane’s retirement income is 35 per cent less than Joe’s.
What Joe and Jane’s story means for you
There are several lessons here, according to Schonwetter.
Couples in which he makes more should consider a spousal RRSP
“Couples should equalize savings and assume that she will live longer,” Schonwetter told Global News. An easy way to do this is through a spousal RRSP.
Joe could save $7,800 a year in his RSSP, then put $200 into a spousal RRSP for Jane. That, on top of the $7,200 Jane contributes to her RRSP, brings her retirement savings to $7,400. The two shouldn’t aim for perfect parity because if Joe dies earlier, Jane would inherit any funds left in his retirement account, which could increase the size of her monthly withdrawals and possibly result in higher taxes. “You want to try to avoid that tax bump,” Schonwetter said.
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The death of a spouse doesn’t cut living expenses in half
If retired Jane survives Joe, she shouldn’t think her living expenses will suddenly drop to half what they used to be. Schonwetter told Global News she has reviewed several professionally drafted financial plans that made this mistake.
In many ways, Schonwetter said, “it’s more costly to live alone, and the tax treatment is less favourable.”
Household expenses aren’t going to drop that much after one spouse is widowed, either. And medical bills normally start to add up quickly after age 84-85, she added.
READ MORE: In an aging Canada, women need to save more – even if they make less
Women need more stocks in their portfolio
Yes, women should probably be saving more. But another way in which they can try to catch up is to chase higher returns, which normally means investing in riskier assets, like stocks, Schonwetter said.
In Schonwetter’s experience, however, women tend to do the opposite, often opting for a mix of investments tilted toward safer investments like bonds and Guaranteed Investment Certificates (GICs) that yield lower returns, she told Global News.
READ MORE: Why saving into an RRSP instead of a TFSA could cost you dearly
In her mind, this has little to do with the personal financial equivalent of men being from Mars and women from Venus, i.e. female investors being intrinsically more risk averse than their male counterparts.
“What stops women from being more heavily weighted toward equities is fear of the unknown,” Schonwetter said. Based on evidence from her practice, she believes that the more women know about financial markets, the more likely they are to be comfortable with stocks.
READ MORE: Here’s what Canadian women would be making in these jobs if they were men
Schonwetter said she is “starting to see a shift” in her female clients’ attitude toward money. Twenty years ago, “the husband would take the lead completely in the conversation,” she said.
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But most importantly, women need a raise
The biggest takeaway from Joe and Jane’s story is obvious. Jane would be considerably better off if she made as much as Joe.
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