Investing in an employer’s 401(k) program has been touted for years as the best way to reach our retirement goals. While it’s still good advice, it likely won’t be enough. For one thing, many companies have become stingier with their retirement plans by lowering or changing the frequency of their 401(k) match contributions.
As a result, employees stand to lose hundreds of thousands of dollars over the course of their careers, experts say. Another reason women must explore other options is that many of us “are seeing periods of non- employment,” says author and wealth coach Deborah Owens. Whether we’re job hunting, freelancing or taking time off to raise children, we’re not steady contributors to a company retirement plan.
In 2012 more than 3 million women age 65 and older lived in poverty in the U.S. When it comes to saving for retirement, Black women often have less to work with because we earn less pay over the course of our careers and are likely to end up alone—single, divorced or outliving our spouses. Once you subtract debts from assets, the median net wealth for single Black women ages 18 to 64 totals $100, putting us the most at risk of facing a retirement catastrophe. So if the 401(k) isn’t enough, what’s a Black woman to do to ensure that she has enough money to last a lifetime? The answer lies in adjusting your mindset, your behavior and your investment strategy. Here are nine steps for taking control of your financial destiny.
First Address Your Mind
1. Make retirement a priority. Forget looking to Social Security. Saving and providing sufficient retirement income is your responsibility and not that of the government or an employer, says Robin A. Young, certified financial planner and founder of Women Behaving Wealthy. “When you expect someone else to provide for you in retirement, your actions and beliefs are different than if you take responsibility.” Young, who spent years at Fidelity Investments, where she advised 500 millionaires on how to invest their money, adds that the only difference between being rich and being broke is behavior. “You must implement wealthy behavior in order to achieve and maintain wealth,” Young explains.
2. Determine what you need. The only way to know how much money you’ll need in your lifetime is to track what you’re spending today. Once you know your annual living expenses, look to retirement calculators such as those at money.msn.com/retirement/retirement-calculator and bankrate.com/calculators/retirement/retirement-pension-plan-calculator.aspx to factor in 3 percent a year for inflation and establish how much you’ll need to maintain your lifestyle. The Social Security Administration projects life expectancy for a woman to be 86. Young says assume you’re going to live to be 90. “So if you plan to retire at age 67, you are talking minimally 23 years in retirement.”
3. Be honest with where you are. If you’re only making enough money to cover your bills, you’re not earning enough. You also need to build an adequate emergency fund and retirement account as well as decrease your debts and increase your assets, Young explains. For example, if your bills total $5,000 a month, you want to strive for at least an additional $500 a month more to save and invest.
Then Modify Your Behaviors
4. Get your side hustle on. If you need to increase your income, look beyond your full-time job. Every woman working full-time should have some kind of side hustle, says Owens. Operating a home-based business, whether it’s selling baked goods or preparing income tax returns, is a strategy that you should pair up with your retirement savings. It also allows you to funnel more dollars into an Individual Retirement Account (IRA) geared toward entrepreneurs, such as a SEP (Simplified Employee Pension) IRA or solo 401(k).
5. Stop raiding your retirement. For many, a 401(k) plan serves as their emergency stash. Women are depleting their retirement funds because of early hardship withdrawals and penalties, says Owens. Your retirement account is not your cash cow. You should have a money market account as your cash reserve that is equal to at least six months’ worth of living expenses. If you are switching jobs, roll your existing 401(k) into your new employer’s plan, Owens adds.
6. Decrease your luxuries. A financial risk factor that women have is luxury, says Young. “Men tend to spend on a few items like electronics, cars and sports events. So when they experience an income-decreasing event, such as a job layoff, it is easier for them to eliminate those things. They won’t buy a new TV,” she explains. Women, on the other hand, tend to have full-fledged luxurious lifestyles (shopping, dining, going to the hairdresser, working out and so on). When they have an income-decreasing event, they are less prepared to cut those expenses and so their recovery takes longer.
Finally, Add The Right Tools
7. Max up to the match. As long as you’re working, take advantage of the 401(k). If your employer offers 50 cents for every dollar you contribute up to 6 percent of your salary, then you should be contributing at least enough to get the full match. If your plan has high fees and limited investment options, you may not want to contribute beyond that match amount and establish another retirement account outside of your 401(k), says Sandy Vaughn, a Merrill Edge Financial Solutions adviser in Dallas. What if there’s no match? Vaughn says a 401(k)’s purpose is to allow you to save for retirement on a tax-advantaged basis. So it’s still a useful tool.
8. Use the time to your advantage. Not sure what to invest in within your 401(k) plan? Look to age-based portfolios (also called lifecycle funds), suggests Vaughn. Age-based funds are designed to be held long-term and automatically invested more aggressively when you are younger and switched to more conservative vehicles like fixed-income and bonds as you near retirement age.
9. Look outside of your 401(k). Once you’re investing the max in your 401(k), contribute to a second retirement account. Owens suggests funding a Roth IRA. While you won’t get a tax break for your contributions, your qualified withdrawals are tax-free. Ideally, you want to contribute the maximum of $5,500 a year or $450 a month, says Owens. But put in whatever you can, even if it’s $50 or $100 a month. “What is hampering women from accumulating retirement dollars is waiting until they have enough money,” she stresses.
This article was originally published in the September 2014 issue of ESSENCE, on newsstands now.