5 Simple, Effective Ways To Set Yourself Up for a Financially Secure Future
Written by
Gabrielle Olya
Edited by
Susan Kim
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One of the easiest ways to set yourself up for a financially secure future is to contribute to your workplace retirement savings account — but many women are not doing this. In fact, only 52% of women participate in 401(k) plans, and the average 401(k) account balance for men ($89,000) is 50% greater than that of women ($59,000), according to Bank of America’s 2023 Financial Life Benefits Impact Report.
This means they may also be leaving free money on the table if their employers offer matching contributions. Given the unique financial challenges that women face — including the gender pay gap and a longer life expectancy resulting in a need for more retirement savings — we should be doing all we can to maximize retirement accounts to ensure we’re on track for a secure financial future.
In this “Financially Savvy Female” column, we’re chatting with Julie Virta, CFP, senior financial advisor for Vanguard’s Personal Advisor Services, about how women can set themselves up for a financially secure future.
What are some ways women can maximize an employer-sponsored retirement account?
Vanguard research has shown us that savings rates, diversification, costs and the ability to remain disciplined and focused on long-term investment outlook are key factors that can give participants the best chance for success. We recommend that participants build up to the recommended savings rate of 12-15% by first trying to meet their employer match (if applicable), and then increasing by 1% annually until they achieve the desired savings rate, which is a combination of employee and employer contributions.
For context, we found that annual automated savings rate increases result in participants saving 20-30% more after three years than employees without automatic increases. If an employer plan does not offer this, participants can consider increasing their savings rate annually on their own.
To note, when switching jobs, a rollover is an option to pursue, as they likely come with flexible investment choices and no tax consequences. We recommend marking your calendar as quickly as possible to see when you can start contributing to the new plan.
What should women do if they do not have access to an employer-sponsored account? How should they decide between traditional and Roth IRA?
In deciding between a Roth and traditional IRA, employees should factor in their current and anticipated tax brackets. When the marginal tax rate stays the same, the Roth and the traditional IRA will generate the same after-tax withdrawal values, even though Roth taxes are paid at the time of contribution (as contributions are made with after-tax dollars) and traditional IRA taxes are paid at the time of withdrawal.
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Because future qualified withdrawals from a Roth IRA aren’t subject to income tax, the withdrawal value of a Roth IRA remains unchanged whether the tax rate goes up or down. With a traditional IRA, a different future tax rate affects the amount of taxes incurred by a withdrawal, since those taxes are paid upon withdrawal. Therefore, a higher future tax rate would make a Roth IRA more attractive, while a lower future tax rate would make a traditional IRA more appealing.
It’s important to note that expectations for tax rates can change over time, which could make the Roth more attractive in the rising tax landscape. In addition, only traditional IRAs require distributions beginning at age 72, making Roth IRAs more flexible.
For those self-employed, small business retirement solutions like an Individual 401(k), SEP IRA or SIMPLE IRA allow for greater contribution limits and are worth exploring.
What asset allocations should women look for if they want to take a ‘set it and forget it’ approach to retirement savings?
For a majority of participants, target-date funds remain a premier investment option, providing broad diversification and automatic rebalancing. Coupled with automatic savings options — such as annual deferral increases — target-date funds are an effective strategy in helping millions of participants save for retirement. The glide path starts with a high equity allocation to capitalize on the growth potential of stocks. It gradually increases the fixed income allocation to reduce volatility as participants approach retirement.
What other steps should women take to ensure they are setting themselves up for a financially secure future?
It’s important for investors to determine their goals early and plan accordingly. For investors seeking a more customized portfolio solution, they may be best served by an advice solution that can tailor their individual portfolio to their particular risk appetite and investment goals.
Steps Toward a Financially Secure Future
Based on Virta’s advice, these are the simple, effective ways women should utilize to set themselves up for a financially secure future:
- Build up to a 12-15% savings rate in an employer-sponsored retirement savings account, if applicable.
- Don’t forget to roll over an employer-sponsored account if you switch jobs.
- If you don’t have access to an employer-sponsored retirement savings account, contribute to a traditional IRA, Roth IRA, Individual 401(k), SEP IRA or SIMPLE IRA.
- Consider utilizing target-date funds.
- Tailor your investments to your risk appetite and goals.
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