The laws pertaining to retirement funds are gender-neutral, as are the investment principles that underlie a successful retirement plan. However, the average life expectancy for women and men is different and that has a knock-on effect on the cost annuities that guarantees to pay an income for life. There are also different pressures on me and women, particularly when it comes to starting a family, and it is useful to factor them in.
Women’s average higher life expectancy means that, on average, their savings must last longer. All else being equal, a woman will pay 10% more than a man for a guaranteed (for life) annuity. Women should, therefore, strive to save at a slightly higher rate. If the guideline for men is to save 15% of their income for 40 years; women should ideally target 16,5%.
Alternatively, women could get a jump on their male counterparts by planning and providing for retirement sooner.
Time is the strongest ally in any savings plan. The sooner you start, the longer you will have to benefit from compounding returns, and the less you will need to contribute from your income. So much so, in fact, that a two-year head-start is as good as saving 10% more per annum.
Some married women might be inclined to save less, or not at all, because their ‘other half’ is putting money away. But if a couple wants to preserve their accustomed lifestyle, their savings rate must be based on their combined income and, most likely, both will need to do their share.
In all other respects, the same basic principles apply to men and women:
- To optimise your outcome use tax-advantaged savings vehicles (individual retirement annuity funds or your employer’s pension/provident fund). The tax benefits can boost your retirement income by as much as 30%.
- Minimise your investment costs. Long term, the fees you pay impact dramatically on your savings outcome. Over 40 years, every additional 1% per annum you pay in fees will reduce your nest egg by around 30%. (Don’t be fooled by large payout projections based on returns that include inflation – your expenses will grow by the same magnitude).
- Invest in a risk-appropriate portfolio. By that we mean a portfolio appropriate for the length of time you will be investing, not your temperament.
In general, women tend to be more risk averse than men. While this stands you in good stead on our roads – also by way of cheaper car insurance – it’s not the way to go with your portfolio. If your time horizon is longer than 5 years, you can afford to have high exposure to the share market.
Shares have the highest expected long-term return over periods exceeding 5 years, albeit at the (emotional) cost of short-term volatility. You need to ride these bumps to earn the long-term reward.
However, getting all these things right will mean very little should you not preserve your savings when you leave an employer. This is where people, women in particular, can be their own worst enemy. Particularly when resigning to start a family, the inclination is often to cash in retirement savings.
After working and saving for, say, eight years, the balance may not seem so impressive, equivalent to just one year’s income perhaps. And the money will become available at just the right time, when household expenses are set to increase.
Apart from preparing for the additional expense of a newborn, expectant parents may want to decorate a nursery, or buy a family car, or even just reduce the bond or other debts to unburden your household cashflow.
Mums-to-be might think they have plenty of time to make the savings up when they return to formal employment, or that their spouses will look after them. Few realise that this classic case of putting the family’s needs above their own will put a big dent in their retirement income one day.
Cashing out means giving up not just what has been saved but also the potential return that would be earned on those savings over the next 30 years or so. That is by far the bigger loss.
Realistically, you can’t save enough in future to make this up, even more so if the career break last for a few years. And, of course, not everyone returns to formal employment. Raising a family is a full-time job itself and some couples do come out on one income. Being a stay-at-home mom often makes a woman excessively dependent on their spouse, and the spouse’s saving habits.
Legally, you have no say over your spouse’s pension or provident fund, even if you are married in community of property. The member alone gets to decide how much to save (within the ambit of the fund rules) and gets to choose whether or not to preserve the retirement fund when a new job comes along, or to lavish it on a midlife crisis.
Starting a family should not mean you have to sacrifice your personal financial security. The children should not be expected to make it up to you one day. Even if they are willing to help they may not be able to afford it. The key is to preserve what is already saved, and align household spending to the available income.
There’s also the chance that marriages don’t last. Fortunately, retirement funds fall into the joint estate (unless a couple is married by ANC without accrual) so spouses do stand to share in pension savings. But again, divorced women frequently cash out their share rather than preserving. Sometimes, it’s just short-sightedness, but more often it is seen as an economic necessity to make the divorce work, replacing one household with two.
Paying off debt might resolve immediate cashflow problems, but it does not change one’s overall financial position. You still ‘owe’ this money, if not to the bank, then to your retirement. There is no legal recourse against a former spouse when that time comes.
The fund member cannot access their retirement fund on divorce (only the non-member spouse can do so). While this may cause him some near-term financial hardship, it leaves that party much better off long-term because they still have their savings, and these will continue to grow until retirement.
The non-member spouse should try to ensure a similar outcome. They should try to balance the economics of the divorce on the basis that they will preserve their share of his retirement fund too. That, in truth, is the real financial cost of a divorce (not the legal fees) and you need to accept this situation as part of the outcome.
Our message to women: take charge of your retirement affairs, and start early. If you are married, pretend you aren’t on this issue, in other words don’t put all your eggs in his basket. Don’t jeopardise your personal financial security for the ‘greater good’ of the family. And don’t sacrifice your retirement lifestyle to make a divorce work.
Because the best way to live freely, and in the present, and to choose yourself when life-changing decisions are necessary is to take the damn question, “Who will look after me when I’m old?” out of the equation.
