Interrupted careers and lower salaries have left many women facing a super savings shortfall. The sooner you act, the better your chances of closing the gap and saving enough for the retirement of your dreams.
There’s no question that Australian women face a significant super savings gap compared to men. According to 2007 figures from the Australian Bureau of Statistics*, men are not only more likely to have super than women (with 81% of men covered, compared to 74% of women), they also have higher balances, with an average of $31,000 for men compared to just $18,000 for women.
But it’s not all bad news. With the right strategy, you can close the gap and achieve the retirement lifestyle you’ve been looking forward to.
Why the gap?
There’s more than one reason for the gender super gap. Here are some of the more important:
- Women tend to earn less. Because women still earn less on average than men, their super guarantee payments are lower.
- Women’s careers are interrupted. Women often stop full-time work to have children and raise a family, then return to work part time.
- Women are often less aggressive investors. Women investors may often make more conservative investment choices than men**, leading them to miss out on the extra returns potentially created by high-growth assets like shares.
- Women live longer. If all that wasn’t enough, women need more super because they are likely to live longer. A woman retiring at 65 in 2012 could expect to spend almost 22 years in retirement, compared to 18.5 years for a man.
How big is the gap?
The size of the gap depends on your salary and changing work patterns as you travel through life, but it can be very significant. Let’s look at an example to see why.
Consider a woman on a salary of $100,000 a year at 31 years of age. Let’s say she stops work for five years to start a family, then returns for three days a week until she is 43. After that, she resumes working full time, eventually retiring at 67. How large a super gap would she face?
The answer is that she would earn $15,558 less a year in retirement than a man of the same age, with the same salary, but whose career wasn’t interrupted.
Add in the effects of a slightly more conservative investment choice – earning a return of 5.5% pa, rather than the 7% pa earned by her male colleague’s higher growth fund – and that shortfall grows to $23,912 a year.
Strategies for younger women
So how do you close the gap?
The obvious first step is to contribute more to super. For younger women, even a small amount can make a big difference over time. For example, a woman working full-time and using salary sacrifice to contribute just $50 a week into super from age 35 could save an extra $154,718 before retiring at 67.
Start by working out how much you can afford to contribute, then decide on the most effective approach, taking tax into account. If you earn less than $46,000 a year, it may be worth making an after-tax contribution so you can benefit from a government co-contribution. (Note that the maximum co-contribution amount is set to halve from 1 July 2012).
For everyone else, salary sacrifice is likely to be the most effective strategy, allowing you to effectively contribute with pre-tax income. If in doubt, consult a financial adviser.
You should also consider whether a more growth-oriented investment strategy is right for you. Many Australians simply accept their employer super fund’s default option, which often has a 60%-70% allocation to growth assets. But those with 30 or more years before retirement may be able to tolerate a much higher allocation, up to 90%.
Strategies for older women
If you’re approaching retirement with a super gap, don’t despair. There are still ways to recover lost ground.
While you have less time to benefit from the effect of compound interest, you may have a higher disposable income, with the mortgage paid off and the children out of home. So you can afford to make much larger contributions to close the gap faster. But don’t forget to take the government’s concessional super contribution caps into account – especially the cap for over-50s, which is set to halve from $50,000 to $25,000 on 1 July 2012.
If you’re 55 or older, a transition-to-retirement (TTR) strategy could help you boost your retirement savings while earning a tax-free income stream. TTR allows you to start drawing a low-tax or no-tax pension from your super while still working, simultaneously contributing much of your salary to super through salary sacrifice. Because super contributions are taxed at just 15%, you may come out ahead.
But the TTR rules are complex and everyone’s situation is different, so it’s a good idea to talk to a financial adviser before you act.
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This story was first posted on Colonial First State’s Wealth Generation – Investor Knowledge Centre