For years, I've been writing about the retirement challenges that women face as a result of their longer average lifespans, lower lifetime earnings and the fact that most women end up alone as a result of divorce, widowhood or never having married.
In fact, it was one of the central themes of the
InvestmentNews
Women Adviser Summit in Boston last week: Single women often face bleaker retirement prospects than their married counterparts.
But
new research from the Center from Retirement Research turns conventional wisdom on its head.
Despite the financial benefits of dual-income households during women's working years, the new CRR study reached a startling conclusion:
Married women in their 50s are more at risk of facing an insecure retirement than any other group of women, including those who are divorced, single, widowed or in one-earner households.
These head-scratching results have some logical explanations and demonstrate how financial advisers can guide clients toward a more secure retirement outcome by encouraging both spouses to save early and often.
The CRR's National Retirement Risk Index compares households' projected income replacement rates (retirement income as a percentage of pre-retirement income) with target replacement rates that would allow households to maintain their standard of living in retirement.
The CRR found that 46% of women age 50 to 59 in two-income households were at risk of being unable to maintain their standard of living in retirement compared to 32% of married women in one-income households and 39% of all single women.
The main reason for the long-term financial insecurity of many two-income households is they tend to make more money but save less. The other key element is the
Social Security tax penalty that causes two-income households to pay more taxes than single-earner households but reap smaller benefits per dollar of taxes paid.
Often, only one spouse in a two-income household is saving for retirement and typically not saving extra for his or her non-saving spouse, according to
companion research from Prudential Insurance Co., which funds the National Retirement Risk Index.
The CRR found that the average 401(k) savings rate for one-income households and two-income, two-saver households is typically around 8% to 9% of household earnings, including employer contributions. However, the average savings rate for two-income, one-saver household is only about half of that — 4.9% of household earnings.
The bottom line: Many two-income, one-saver households — which represent about 42% of all two-income households — aren't saving enough. Spouses with access to a workplace retirement plan would have to save 16% of their earnings to match the overall savings rate of the two-income, two-saver household, according to the CRR report.
In addition, two-income households often pay more in Social Security taxes than a one-income household with the same level of income. That's because the federal government only collects Social Security taxes on an individual's income up to a certain threshold ($132,900 in 2019).
If a one-income household earned $200,000 this year, its Social Security tax bill would be $8,240 ($132,900 x 6.2% payroll tax rate for employees.) But if a two-income household earned the same $200,000 split evenly between each spouse, all of their earnings would be subject to the Social Security tax for a total of $12,400 ($100,000 x 6.2% x 2).
The tax penalty for two-income households can be even worse if one spouse is a self-employed independent contractor. In that case, he or she would have to pay both the employee portion of the Social Security taxes and the employer share, for a combined tax rate of 12.4%. A two-income couple with $200,000 of income evenly split, where one spouse was self-employed, would have a total Social security tax bill of $18,600. That's $10,360 more in Social Security taxes than the one-income household would pay.
If that couple paying an extra $10,360 in Social Security taxes was instead able to invest that sum each year for 35 years, earning a 6% annual return, they would accumulate an extra $1.15 million for retirement.
In addition to possibly paying more in Social Security taxes, women in two-income households may find that they're only eligible for the same amount of Social Security benefits as women in one-income households.
A wife is eligible for a spousal benefit equal to one-half of her husband's benefit if the benefit she earned on her own work record is lower than one-half of her husband's benefit. In contrast, a woman in a two-income household who earns about the same as her spouse will not receive any Social Security spousal benefits and potentially no survivor benefits either.
Financial advisers should encourage both spouses to save through their company-sponsored retirement plans, at least up to the employer match, and to fund an individual retirement account if they don't have access to a retirement plan at work.
Individuals age 50 and older are eligible to make catch-up contributions to their retirement accounts, and couples
should coordinate their Social Security claiming strategies to maximize retirement and survivor benefits.
