The Girl's Guide to Retirement

Updated on February 4, 2008.

FIRST, THE GOOD NEWS: Today's women are more educated than men — and they're nearly as likely to be working.

In 2007, 28.2 million women age 25 and older held bachelor's, master's, professional or doctorate degrees, compared with 27.6 million men, according to the U.S. Census Bureau. Nearly 66 million women were actively employed, alongside 76 million men, according to 2006 U.S. Census data, the latest available. And in 2006, 41% of all privately-owned U.S. firms — roughly 10.4 million companies, according to the Center for Women's Business Research — were at least half-owned by women.

Behind these numbers, however, is a disturbing disparity: When it comes to retirement planning, women lag significantly behind. "Women often underestimate how much money they'll need in retirement," says Ginita Wall, a certified financial planner (CFP) and co-founder of the Women's Institute for Financial Education, or wife.org. "They either think they'll cut their expenses or they'll live off Social Security."

But the fact is, a comfortable retirement is a breathtakingly expensive endeavor. Financial planners suggest that one should shoot for an annual retirement income that's roughly 80% of your preretirement income. Translation? Everyone needs to save — a lot. But women — who tend to live five years longer than men — should actually be saving more than men.

And sadly, they aren't. In its 2007 Retirement Confidence Survey, the Employee Benefit Research Institute (EBRI) found that 30% of women believe they need under $250,000 for retirement, while 22% of men believed they needed anywhere from $500,000 to $1 million.

Retirement planning strategies aren't necessarily different for women than they are for men. But it's particularly important that women take the goal of saving for retirement seriously. Here are three rules to live by.

Start Early
Women still earn less than men. In 2006 a female full-time worker earned 77 cents for each dollar earned by a man, according to the Women's Institute for a Secure Retirement, or Wiser. That amounts to $445,000 less in earned income over a woman's lifetime.

How to fight back? Start young. Consider this: If you start saving $5,000 a year when you're 25 years old, by the time you turn 65 you will have a comfy $1.3 million to live off. But if you start 20 years later, at age 45, you will have less than $230,000. (That's assuming an 8% annual return. For a more detailed account, crunch your numbers in our 401(k) Planner.)

Too late to start young? Then it's time to make up for lost time. Click here for advice.

Create Your Own Benefits Plan
Women are more likely than men to cut back on their hours of employment to meet family needs. A quarter of working women worked part-time in 2007, compared with about 11% of working men, according to the U.S. Bureau of Labor Statistics.

"Women typically take time out of their careers to raise a family, and they often take lesser-paying jobs in order to have more flexible hours," says Wife.org's Wall. "So a doctor may, rather than have a private practice, end up working in a clinic so she can pick up her kids at 5:30 every night."

Women are also more likely to work for themselves. Female-run businesses are popping up at nearly twice the rate of all firms, according to the Center for Women's Business Research.

The net result is that women are less likely to have an employer-sponsored retirement plan, such as a 401(k). In that case, a traditional IRA can provide an upfront tax benefit — you can make an up to $5,000 tax-deductible contribution for 2008 ($6,000 for those 50 or older), while a Roth IRA allows you to withdraw retirement funds tax-free (but contributions are made with after-tax dollars). For more on the IRA contribution limits and eligibility, click here.

Small-business owners, in the meantime, should consider opening a SEP IRA, which allows you to contribute up to 20% of self-employment income, up to $46,000 a year. For more retirement options for small businesses, read our story.

And what about stay-at-home moms? Women who don't work outside the home can set up a Spousal IRA.

Stay on Top of the Family Finances
Many women still let their husbands handle the family finances. Should that marriage end in divorce — or should the wife become widowed, that can be a disaster. "At Wife.org we have a saying, 'A man is not a financial plan'," says Wall.

It's an all-too-common situation that leaves many widows and divorcees on the path to bankruptcy: a problem that Muriel Siebert, founder of the Women's Financial Network at Siebert and the first woman to own a seat on the New York Stock Exchange, would like to see change. "You've got women today that are going to be left a big responsibility and they don't know the numbers," she says. "It's not that they're stupid, it's that they've never had to do these things."

To protect yourself, make sure you're involved with investment decisions, stay on top of your debt obligations and make sure you have enough insurance coverage. For advice on how to protect yourself in the event of a divorce, read our story.

What if your husband doesn't like to talk about these things? "Ask the questions and if it doesn't get answered the first time, find another way to ask it," says Stephanie Sherman, a financial planner with Prudential Financial. "Too often women say, 'Oh, my husband said it'll be fine.' That's not always the case." For more on that, read our story, The Five Mistakes Married Women Make.