Women: investing for retirement
Having enough money to live on throughout retirement can be a difficult objective to achieve, especially for women. Our research suggests that many women face a significant likelihood, ranging from moderate to high, of not meeting their retirement income goals. It’s crucial for women to understand the different aspects that affect retirement savings to be able to plan for their future.
Planning for retirement income can present distinct hurdles for women when compared with men. One uncontrollable factor that we all face is our life expectancy, which tends to be longer for women, on average. This longer lifespan increases the risk of falling short of desired income goals. Furthermore, women can often experience career interruptions for caregiving responsibilities, such as raising children or caring for family members. These breaks can result in lower retirement savings contributions or pauses, heightening the risk of not saving enough for retirement.
What is shortfall risk?
In retirement planning, shortfall risk refers to the possibility of not reaching your desired or planned income level for retirement. This desired level is usually a percentage of your preretirement income, often set at around 70%, meaning you should have 70% of your preretirement monthly income as your monthly income during retirement. It can be tough to achieve this goal, so our aim is to assist women in understanding and evaluating how four key factors affect the risk of falling short on their retirement income objective.
- How long you might live
- Starting date for contributions
- Contributions to your retirement plan
- Investment choices
Establishing a base case
We used the following parameters as a base case against which to measure the effect of these factors:
- Accumulated savings over a time horizon of 40 years (from 25 years old to 65 years old)
- 10% total contribution rate (5% employee contribution plus 5% employer match)
- Retiring at age 65
- An income replacement goal of 70% comprising a combination of 35% government pension (e.g., Social Security) and 35% accumulated retirement contributions
- Mortality data for women in Canada
1. How does longevity affect your retirement money?
Based on our research, if everything else stays the same, a woman who retires at age 65 is likely to face a higher risk of not meeting her income target for retirement compared with a man. In Canada, women have shortfall risk of 34% compared with 29% for men. This is worrisome, especially if you’ve been saving consistently for 40 years and contributing 5% of your income matched by 5% employer contribution. And what if you take a break from work to raise kids or care for your parents? In those situations, your risk of not having enough money to meet your desired retirement income could go up significantly.
Due to longer life expectancies, women have a greater risk of income shortfall in retirement
Source: Multi-Asset Solutions Team, Manulife Investment Management, November 13, 2023.
2. The effect a starting date has on your future finances
The timing of when you begin saving for retirement plays a big role in whether you’ll have enough money later based on your stated income objectives. To understand this risk better, we measured different scenarios: starting to save at ages 25, 35, and 45. If you begin saving at 35 instead of 25, our findings suggest that your risk of falling short of your target is 47%, which is high. Waiting until age 45 increases this risk even more—to 67% for Canadian women, which is a substantial jump.
Effects on shortfall risk when delaying investing for retirement
Source: Multi-Asset Solutions Team, Manulife Investment Management, November 13, 2023.
It’s crucial to understand that this risk stays significant even if you end up saving the same total amount over time. This is because the advantages of starting early and letting your money grow over time (compounding) cannot be made up for later on. Let’s consider a hypothetical example.
Jody and Mariam both invest the same amount for retirement—$500,000—and they both receive the same annual growth of 6% on their investment. However, Jody waits 10 years before starting to save. Even though both women contribute the same amount, Jody misses out on the early growth that benefits Mariam, resulting in Mariam having over $650,000 more by the time they both reach retirement age. Mariam’s total accumulation is 47% higher than Jody’s.
| Mariam | Jody |
| $500,000 total contributions over 40 years from age 25 to age 65 | $500,000 total contributions over 30 years from age 35 to age 65 |
| Growing at 6% per year | Growing at 6% per year |
| End value: $2,050,596 | End value: $1,396,695 |
For illustrative purposes only.
Measuring the effects of early compounding
Source: Multi-Asset Solutions Team, Manulife Investment Management, January 2024. The above illustration does not depict an investment in any Manulife Investment Management portfolio and is a hypothetical example for comparison purposes only. Rates are subject to change. This illustration does not reflect the effect of asset charges and account fees. These fees would reduce the performance shown in the above illustration. The investment return and principal value of an investment may fluctuate so that distributed investments may be worth more or less than their original value. Tax deferral may work best for long-term goals. The illustration assumes (1) no initial lump sum, $12,500 invested yearly for 40 years; (2) no initial lump sum, $16,667 invested yearly for 30 years. All hypothetical assumptions include a compound annual growth rate of 6%, accrued yearly.
3. How your savings rate affects your income
As would be expected, the amount you save plays a big role in how much income you’ll have during retirement. But when we look at the results of saving 5% more or less than the base rate of 10%, the impact isn’t evenly spread out. For instance, if you save half of the 10% base rate, your risk of not meeting your retirement income objective could more than double, jumping from 34% to 83%. On the flip side, to significantly decrease your risk, you don’t necessarily need to double your contributions. Increasing your total contributions from 10% to 15% could significantly reduce your risk of falling short of your target. In Canada, increasing your contributions to 15% may cut your risk from 34% to just 8%.
Saving 15% of your income can be tough, especially with other expenses to cover, but remember that many retirement plans include employer matches, so achieving a 15% total contribution rate might mean contributing 7.5% yourself and getting a 7.5% match from your employer, which is a more achievable goal.
Shortfall risk based on different contribution rates
Source: Multi-Asset Solutions Team, Manulife Investment Management, November 13, 2023.
4. Choosing the right investment approach carefully
We often talk about saving for retirement, but it’s more accurate to think of it as investing for retirement. Saving implies just putting money aside, but it’s crucial to choose investments that will help your money grow over time, which is what investing is about. When it comes to retirement, you need to think carefully about how to make your money grow, which may mean taking on some investment risk. In our analysis, we found that sticking to overly conservative options such as cash or near-cash investments almost guarantees (90%) that you’ll fall short of your income objectives. This risk is even higher if you start investing later than age 25, as your money has less time to grow, or if your total contributions aren't at least 10%. It’s important to choose your investments wisely. That’s why it may be a good idea to seek financial advice. Long-term retirement investment solutions, such as target-date portfolios that adjust their mix of investments as you get closer to retirement, could be helpful. Talk to a financial advisor to get advice for planning for your future.
Diversifying your investment choices helps to lower shortfall risk
Source: Multi-Asset Solutions Team, Manulife Investment Management, November 13, 2023. Above portfolios are based on indexes. Please see important disclosures below for a list of indexes used. It is not possible to invest directly in an index. Past performance does not guarantee future results.
Bringing it all together
When it comes to planning for retirement income, women can have unique obstacles compared with men, particularly regarding one thing we can’t control: our average lifespan. That’s why it’s crucial to understand what factors affect the risk of not meeting your income goals for retirement.
The length of time you have until retirement and how much you save each month will have the biggest impact on reaching your desired income goals, but it’s also vital to make smart choices about where to invest. This becomes even more important considering that women generally live longer.
Planning for retirement can be tough, but it’s not impossible. By understanding the challenges that women in particular face and working with a financial advisor to create a plan based on personalized goals and situations, women can make better decisions for their financial future.
Speak to your financial professional about planning your retirement journey.
Important disclosures
Target-date portfolio at age 25 consists of equities (97%), cash (2%), U.S. Treasuries (1%); at age 65 consists of equities (55%), fixed income (38%), real assets (5%), cash (2%). 60/40 portfolio consists of equities (60%) and fixed income (40%), cash portfolio consists of cash (100%). Data is based on Manulife Investment Management's Multi-Asset Solutions Team (MAST) asset class forecasts, which comprise MAST's expectations of how different asset classes will perform in the future over a 20-year-plus time horizon. Refer below to the list of indexes used. It is not possible to invest directly in an index. Past performance does not guarantee future results. Forecasts are derived using quantitative modeling techniques, which are mathematical and statistical based methods—some of which are widely used in financial markets and some of which are developed specifically by MAST—for analyzing complex financial data. In addition, forecasts include estimates of anticipated economic conditions, including, but not limited to, inflation and interest rates, GDP and currency exchange rates, and the anticipated effects these may have on financial markets and asset prices. There is no assurance that such events will occur, and actual asset class returns may be significantly different from those shown here. This material should not be viewed as a recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy and are not meant as predictions for any particular index, mutual fund, or investment vehicle.
Equities
U.S. large cap is represented by the S&P 500 Index, which tracks the performance of 500 of the largest publicly traded companies in the United States. Canadian large cap is represented by the S&P/TSX Index, tracks the performance of the Canadian equity market on the Toronto Stock Exchange (TSX). Non-U.S. developed is represented by the MSCI Europe, Australasia, and Far East (EAFE) Index, which tracks the performance of large- and mid-cap stocks of companies in those regions. Emerging markets is represented by the MSCI Emerging Markets (EM) Index, which tracks the performance of large- and mid-cap EM stocks.
Fixed income
Canadian investment grade is represented by the FTSE Canada Universe Bond Index, which tracks the performance of marketable government and corporate bonds outstanding in the Canadian market. Global investment grade is represented by the Bloomberg Global Aggregate Bond Index, which tracks the performance of global investment-grade debt in fixed-rate treasury, government-related, corporate, and securitized bond markets. U.S. high yield is represented by the Intercontinental Exchange (ICE) Bank of America (BofA) U.S. High Yield Index, which tracks the performance of below-investment-grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market and includes issues with a credit rating of BBB or below. Canadian mortgage-backed securities is represented by the FTSE Canada MBS Index 3-5 Yr Non-prepayable, which tracks the performance of Canadian mortgage-backed securities with maturities ranging from 3 to 5 years that are not subject to prepayments.
Real assets
Global REITs are represented by the FTSE EPRA Nareit Developed Index, which tracks the performance of listed real estate companies and real estate investment trusts in developed markets on a free float-adjusted basis. Commodities are represented by futures contracts of commodities. Private infrastructure is represented by the Burgiss Global Infrastructure Funds Index, which is calculated from the Burgiss Manager Index, one of the most comprehensive datasets of private capital funds, funds of funds, and their holdings.
Cash
Cash is represented by the FTSE 91-day T-Bill Index, which measures the performance of U.S. Treasury bills with a maturity of approximately 91 days.
The information in this material, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.
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