When compared with men, women are much less likely to invest their savings and thus miss out on significant wealth, especially in retirement years. This fact is especially important when you consider the reality that, on average, women live longer but earn less than men.
In other words, there is a severe pay and pension gap between the genders.
Although closing the pay gap may be beyond the control of most workers, closing the pension gap is far easier than one initially assumes. While some might think they’d have to win the lottery in order to have millions in the bank at retirement, that’s simply not true.
Consider that if you win the Mega Millions, your prize is $1 million, but your chance of actually winning is a dismal 1 in over 12.5 million. Meanwhile, thanks to the power of compound interest, you can still have $1 million or even more in your account if you invest your savings, especially starting at a relatively younger age.
I don’t know about you, but I’d rather have reliable money in the bank rather than depend on 1 in 12.5 million odds. With that said, here’s how women (and men) can reach the $1 million goal without taking a major gamble.
Women and Investing: Knowledge Is Power
As people near retirement years, their biggest worry centers around money, or rather lack of it.
Surveys indicate that many baby boomers who are over the age of 55 have low levels of financial wealth and very little in assets other than their homes. And a large percentage believe that they have failed to plan for retirement adequately.
Financial knowledge and planning are clearly interrelated. People with higher financial literacy are more likely to plan successfully for retirement. This aspect of not having saved enough for retirement years seems to affect women even more than men.
Almost all of us, but especially women, would benefit from educating ourselves more about the choices available for saving for retirement.
There are various educational programs available through employers, federal and state governments that aim to introduce people to different retirement planning products.
One of the venues to invest your hard earned money is in the stock market, either through individual stocks or exchange-traded funds (ETFs) offered on U.S. exchanges.
Taking a Longer-Term ‘Bet’ for Retirement
I genuinely believe it’s better to put your money into company shares or ETFs than to risk your hard-earned money on lottery tickets.
The internet offers various investment calculators to have a better understanding of how much your savings would grow over a period of time.
For example on Jan. 1, 1990, if you had invested $1 in the S&P (through a mutual fund or ETF), at the end of Dec. 31, 2018, it would have now grown to $13.16 (including the dividends, but not adjusting for inflation). This final amount does not include any further contributions you might have made to your fund during the year.
The annualized returns could possibly be higher if one diversified and invested in a range of funds, such as those that have exposure to high-growth companies in the technology sector.
Here is another calculation: let us assume you are 25 years old and you’d like to invest $1,000, say in an ETF, now. And going forward, you will make an additional $3,600 of contribution each year, at the end of the given year. You have 40 years to invest. And the annual return is 8%, compounded once a year. At the end of the investment horizon, the total you’d have in your account is $954,327.99.
If the annual return is 9%, the amount becomes $1,247,786.22 and if the return is 10%, the final amount is $1,638,592.46.
These numbers show that a person who saves about $300 per month for 40 years, starting at the age of 25, say through investing in various ETFs, is likely to have a savings of around $1 million when she or he retires, around the age of 65.
If you can increase how much you can save per month, say to $400 (or $4,800 a year), the final amount at the end of 40 years at an annual return rate of 8% is $1,265,195.81 (compared to $954,327.99 by saving $3,600 a year).
In other words, there is no need to play the lottery; we can pretty much all become millionaires in our lifetime!
The critical point to remember is to start early and save a definite amount each month. In a future article, I will discuss how you can make up for the difference if you started saving for retirement not in your 20’s, but rather in later years.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.