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Having enough money to live on throughout retirement can be a difficult objective to achieve, especially for women. Research suggests that many women face a significant likelihood of not meeting their retirement income goals. It’s crucial for women to understand the different aspects that affect retirement savings to be able to plan for their future. Having said that, a well orchestrated and thought-out retirement model [plan] will help create a set of clear objectives leading to your retirement.
Planning for retirement income can present distinct hurdles for women when compared to men. One uncontrollable factor that we all face is our life expectancy, which tends to be longer for women on average than for men. This longer lifespan increases the risk of falling short of desired income goals. Furthermore, women can often experience career interruptions for caregiving responsibilities, such as raising children or caring for family members. These breaks can result in lower retirement savings contributions or pauses, heightening the risk of not saving enough for retirement.
What is shortfall risk?
In retirement planning, shortfall risk refers to the possibility of not reaching your desired or planned income level for retirement. This desired level is usually a percentage of your pre-retirement income, often set at around 70%. This means aiming to have 70% of your pre-retirement monthly income as your monthly income during retirement. It can be tough to achieve this goal, so understanding and evaluating how four key factors impact the risk of falling short is important.
- Longevity
- Starting date for contributions
- Amount Saved
- Investment choices
Establishing a base case
Below are the parameters used to measure the effect of these factors:
- Accumulated savings over a time horizon of 40 years (from 25 years old to 65 years old)
- 10% total contribution rate (5% employee contribution plus 5% employer match)
- Retiring at age 65
- An income replacement goal of 70% comprising a combination of 35% government pension (e.g., Social Security) and 35% accumulated retirement contributions
- Mortality data for women in Canada
The Fear of Outliving your Money
Research shows, if everything else stays the same, a woman who retires at age 65 is likely to face a higher risk of not meeting her income target for retirement compared to a man. In Canada, women have shortfall risk of 34% compared to 29% for men. This is a concern, especially if you’ve been saving consistently for 40 years and contributing 5% of your income matched by 5% employer contribution. And what if you take a break from work to raise kids or care for your parents, your risk of not having enough money to meet your desired retirement income could go up significantly.
The Impact of Starting too Late
Timing is everything…when you begin saving for retirement plays a big role in whether you’ll have enough money later on based on your stated income objectives. If you defer starting your savings at age 30 versus 25, the risk of falling short of your target is 47%. Waiting until age 45 increases to 67%.
The risk stays high even if you save the same total amount over time. This is because the advantages of starting early and letting your money grow over time (compounding) cannot be made up for later on. Let’s consider a hypothetical example:
Claudia and Andreea both invest the same amount for retirement—$500,000—and they both receive the same annual growth of 5% on their investment. However, Andreea waits 5 years before starting to save. Even though both women contribute the same amount, Andreea misses out on the early growth that benefits Claudia, resulting in Claudia having $239,609 more by the time they both reach retirement age. A difference of 5 years is a big number.
| Claudia | Andreea |
| $500,000 total contributions over 40 years from age 25 to age 65 | $500,000 total contributions over 35 years from age 30 to age 65 |
| Growing at 5% per year | Growing at 5% per year |
| End value: $1,589,609 | End value: $1,350,000 |
For illustrative purposes only.
Contribution Amounts
As expected, the amount you save plays a big role in how much income you’ll have during retirement. When you look at the results of saving 5% more than the base rate of 10%, the impact isn’t evenly spread out. For instance, if you save half of the 10% base rate, your risk of not meeting your retirement income objective could more than double, jumping from 34% to 83%. On the flip side, to significantly decrease your risk, you don’t necessarily need to double your contributions. Increasing your total contributions from 10% to 15% could significantly reduce your risk of falling short of your target. Increasing your contributions to 15% may cut your risk from 34% to just 8%. The 15% annual contribution is an additional 2.5% for each participant.
Choosing the right investment
We often talk about saving for retirement, but it’s more accurate to think of it as investing for retirement. Saving implies just putting money aside, but it’s important to choose investments that will help your money grow over time, which is what investing is about. When it comes to retirement, you need to think carefully about how to make your money grow, which may mean taking on some investment risk. Sticking to overly conservative options like cash or near-cash investments almost guarantees (90%) that you’ll fall short of your income objectives. This risk is even higher if you start investing later than age 25, as your money has less time to grow, or if your total contributions are not at least 10%. It’s important to choose your investments wisely. Diversifying is important to help reduce shortfall risk.
Bringing it all together
When it comes to planning for retirement income, women can have unique obstacles but is doesn’t need to be a taunting task. That’s why it’s important to have a retirement model which outlines the amount to invest, when to start investing, account for any interruptions in contributions leading to the rate of return and type of investments. The impact of inflation on your retirement income along with your entitlement to social security [CPP/OAS] will determine your contribution amounts. All these concerns can be addressed with a well-designed model giving you peace of mind and assist with reaching retirement stability.
