Does money have you have mystified? Are you clueless when it comes to your 401(k)? April is financial literacy month, a time dedicated to helping Americans focus on finance. No need to crack open a book! Tony Drake, CFP® and Brad Allen have a crash course in financial literacy for you.
Everyone needs to understand the basics of financial literacy to achieve a secure retirement. In a recent study, just 17% of women and 35% of men age 60-75 passed a financial literacy quiz that covered several financial planning topics, including Social Security, tax efficiency and long-term care. This is startling to me, because I work with seniors on these issues every day. By the time you’re in your 60s, you should have a plan in place to guide you through your golden years. Remember: what you don’t know can hurt you when it comes to your finances, so go ahead and ask for help!
One of the financial literacy quiz questions asked if the respondent saw themselves as the primary financial decision maker or whether they shared the decisions with their spouse. 65% of men said they were the primary decision maker, and only 20% of women saw themselves that way. Because of this thinking, women may not put as much of an emphasis on financial literacy as men do. Women aren’t just dealing with a financial literacy gap, they’re also facing a significant pay gap. On average, women in the U.S. make 79 cents for every dollar a man makes. That pay gap is affecting much more than women’s income. It affects other aspects, like their savings and retirement plans.
What Can Women Do to Catch Up When it Comes to Their Finances?
It’s crucial that women play an active role in their finances, whether that’s daily budgeting or long-term financial planning. A recent survey shows 56% of women are guessing how much money they will need in retirement; only 8% of women say they used a retirement calculator or worksheet to determine their savings needs. Men are far less likely to guess their savings needs. Women live an average five years longer than men. They need to be saving more and understanding their finances now so they can take control when they are alone. Retirement is not a guessing game. If you don’t know how much money you need to save for retirement, I recommend starting with an online calculator to narrow in your focus. Then sit down with a financial professional who can build a customized plan for you.
Build Your Retirement
Right now, Americans have a $13 trillion retirement savings shortfall! This shortfall is even worse for women because of the pay gap. This means women need to be saving more for retirement than men. I recommend dedicating at least 10-15% of each paycheck to your 401(k). If you can’t put that much away right now, at least save enough to take advantage of your employer match and build from there. You can open an IRA even if you don’t work outside the home, as long as you and your spouse file a joint tax return. You can contribute up to $5,500 a year to an IRA. If you’re 50 or older, the contribution limit goes up to $6,500.
Strategize Social Security
More than 60% of women in a recent survey admit to knowing very little about Social Security benefits, compared to about 45% of men. This could be why about three-quarters of women take Social Security benefits early, leading to a reduced benefit for the rest of their life. Social Security is complicated. If you can delay collecting benefits past your full retirement age, your benefit will continue to grow until you turn 70. It’s important you have a plan for retirement and a strategy for tapping into your Social Security benefits. Sit down with a financial professional to determine what’s best for your situation.
Save for Emergencies
Emergencies like an unexpected car repair or home repair happen. It’s important that the unexpected doesn’t set you back in your savings. Only 45% of women in a recent survey say they have an emergency fund, compared to 64% of men. If you don’t have an emergency fund, start putting a portion of each paycheck into a separate savings account. An emergency fund should have enough cash to cover 3-6 months’ worth of expenses.
Learn to Say No
Many parents are risking their retirement in order to help their adult children. 56% of parents have paid for their kids’ groceries; 40% have paid for health insurance; 21% have covered their rent. Of course, you want to help your kids if they get themselves into a jam, but that kind of financial support for adult children can be detrimental to your retirement savings if it continues long-term. Not to mention, you may feel like you’re helping your kids, but you’re not helping them establish their own financial habits. Women especially need to pay themselves first. It’s just like flying; the flight attendant tells you to put the life vest and oxygen mask on yourself first, before you help family members.
Deal with Debt
When it comes to credit card debt, women are in a better position than men. Men have an average balance of $7,407, while women have an average of $5,245 in debt – that’s 22% less. However, the news isn’t so good when it comes to other types of debt. Nearly two-thirds of the $1.3 trillion in student loan debt in the United States is owed by women. They have a student debt load of $833 billion, compared with $477 billion for men. There are many reasons for this, including the fact that more women go to college than men. They may choose majors that don’t make as much money. Also, many women take time off to raise a family or take care of elderly parents. However, another reason for the discrepancy in student loan debt comes back to financial literacy. Women were three times more likely than men to say they didn’t understand their financing options of their student loans.
Where Do We Start?
this goes for men and women – set up a monthly household budget and stick to it! A budget is the backbone to your financial plan – it will help you know how much money you can dedicate to your goals, like paying off debt and saving for retirement. A budget will keep track of your expenses: how much you spend on everything from your mortgage to your groceries to movies and entertainment. Don’t forget to include saving – both for the short-term and the long-term. All of that needs to add up to less than your income. If you’re struggling to create a budget, you can use a worksheet. There are also a lot of apps, like Mint.com that can help you get started.
The Retirement Ready radio show is featured every Saturday on WTMJ 620 AM at 1:00 pm. We will bring you information on: Social Security options, retirement trends, options to retire with life changes and achieving a secure financial future. Listen live here: WTMJ 620AM LIVE
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Drake & Associates does not offer tax or legal advice.
Advice and opinions expressed during Retirement Ready are solely that of the hosts or guests of Drake & Associates, LLC and not WTMJ Radio or The E.W. Scripps Company.