Saving for Being Out of the Workforce

Mother with her childrenBy Manisha Thakor

Studies show that women earn just $0.77 for each dollar earned by men1, while spending an average of 11 years out of the paid workforce2, often to care for children or elderly parents.

What runs through your mind when you hear that?

If you are like me, you’ve heard those statistics so often they don’t register as something that affects your day-to-day life.

So let me ask about those figures in a different way. If you are thinking of starting a family, would you like to spend some time at home with your kids? If your parents are in their golden years, do you want the flexibility to be able to help them if they need it? And after years of hard work yourself, would you like to retire and spend some quality time volunteering, traveling or spending time with family?

If your answer to any of these questions is yes, it’s worth taking a closer look at those statistics. For shorthand, I like to call them “the 77/11 effect.” Let’s compare the experiences of Joe and Jane to illustrate.

After graduating with an engineering degree, at age 25 Joe is earning a healthy $50,000 per year. For the sake of simplicity, let’s say Joe’s salary never changes. Joe sets aside 10% of his income per year in an employer-based retirement plan like a 401(k). He does this every year until the age of 70. He invests in a broadly diversified mix of stocks and bonds via low-cost mutual funds and earns an average return of 6% per year. At age 70, Joe has a nest egg of just over $1.1 million.

Now let’s look at Jane’s experience. Jane also graduates with an engineering degree, but she only earns 77% of what Joe does – so $38,500 instead of $50,000. Jane also saves 10% per year, but since her salary is lower that 10% is equal to $3,850 instead of Joe’s $5,000. Jane also earns 6% on her investments. However, at age 35 she steps out of the workforce to raise her children. At age 46 she steps back in and again resumes saving $3,850 per year and continues doing so until age 70. Guess how much Jane has at retirement? Less than half of Joe’s nest egg – just over $400,000.

So what are we women to do? Simply put, we must plan ahead to be out of the workforce.

If you think you may want – or need – to step away from work to care for children or elderly parents, here are some recommended action steps:

  • Save like a ninja starting right now. As scary as that may sound at first, even little bits can really add up. In Jane’s case, an extra $25 per week added to her savings during each of her working years could add an extra $100,000 to that nest egg.
  • Create – and keep up with – a professional network. While out of the workforce make a conscious effort to stay connected to people who can help you find work when you want to re-enter. This will be time well spent.
  • Consider working part time. The decision does not have to be all or nothing. Even if it’s just ten hours a week, keeping your toe in the employment pool keeps your résumé fresh, which in turn, increases your earnings power.
  • If you are married, don’t forget to save in a spousal Individual Retirement Account (IRA) during your non-working years. Assuming that your household income exceeds the IRA contribution limit and you file a joint tax return, both you and your spouse can max out those accounts. For 2013 you can contribute as much as $5,500 to an IRA, or up to $6,500 for those age 50 and over.
  • Ask for it. A raise, that is. Academic researchers like Linda Babcock, co-author of the book Ask For It have shown that one reason women earn less is that we don’t negotiate our salaries early on in our careers to the same extent that men do. Highlight the value you are adding to your employer and propose a win-win solution.

Taken together, these steps can help you both turn that 77/11 effect on its head and afford you the opportunity to focus on your family without hurting your finances.

Need Financial Help?

Phone ringing Call us 800-842-2888

Phone with arrowSchedule a callback

Circular people graphicAttend a meeting or seminar 

Experiencing a Life Event?

Tools & Calculators

See all 

Financial Essentials
Workshops & Webinars

  • Tomorrow in Focus: Saving for Your Ideal Retirement
  • Money at Work 1: Foundations of Investing

See all 

Your future, your IRA

Learn how a TIAA-CREF IRA can help you save.

Learn more

C11157