The Dollars and Sense of Women and Work

As a career coach and seminar leader, I’ve met hundreds of “stay-at-home mothers” who spend months—or even years—weighing the pros and cons of returning to work. Though the immediate assumption would be that these women can easily afford never to work again, I’ve learned that even in affluent communities, finances are relatively tight in quite a few one-income households. The monthly bills are paid on time, but there is not a lot of room for non-essential extras. There is also concern about how to afford multiple college tuitions—let alone a long retirement. But these concerns are often pushed off to the side—with the justification that even if money does not flow freely, the motherhood role is Priority Number One.

None of the women I’ve coached have told me they never intend to return to the workforce. But unless there is a pressing financial reason to return due to a life “you never know” (a husband’s job loss, a divorce, etc.), women seem to feel they have plenty of time to reinstate their professional selves. Clearly, most want to wait until their youngest children are at least in middle school—but I see plenty of women not making a move until all their children are out of the house.

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While women who are “empty nesters” may have 10 or 20 years until the traditional retirement age of 65, it rarely makes long-term financial sense to delay a return to the workforce. Each year that goes by is a year of lost income, savings and investment potential, professional experience, skill development and earning power. More to the point, every year out of the workforce makes a woman more vulnerable to life’s “you never knows” and less well positioned to support herself and her family.

Women who think (or are told) they will not earn enough money to return to the workforce are making decisions rooted in the present time. In the context of insuring against life’s “you never knows”, there is no amount of money that is insignificant to save and invest. Financial advisors in my professional circles frequently tell me with great surprise that many well-educated women don’t consider how the basic concept known as “the power of compounding” increases even small savings over time. Even saving a small amount can make a big impact on your ability to fund life’s “you never knows” and a long retirement.

Here’s an example:

Assume Nancy returns to work at age 45. She does not aim to return to a big corporate job, and instead gets a part-time, mid-level job during school hours at a small local firm with compensation of $25 per hour. So she’s earning $26,000 per year, and her husband’s earnings put them the 50% State and Federal tax bracket. Since she does not need to work to cover current household expenses, we’ll assume she can save all the money she clears after taxes. Let’s say, to keep things simple, she works for 20 years and her compensation stays the same each year. If she socks her take-home pay away, what will she have saved by age 65?

To answer that question, I consulted Galia Gichon of Down to Earth Finance, a financial advisor who counsels women in and out of the workforce. If Nancy clears $13,000 after taxes per year, and she invests that amount in, say, a Moderate Balanced Allocation Mutual Fund with a conservative return of 5% for 20 years, she will have savings of $444,000 at age 65.  That is almost half a million dollars in savings for a small, containable, moderate stress job that is close to home and during school hours.

Many of the women who feel comfortable leaving the workforce have husbands who are high earners. But many others throw caution to the wind and leave the workforce when their households are on less firm financial footing. Here’s an example of a woman who has a joint tax filing in a lower tax bracket and different return to work circumstances:

Mary returns to work at age 55 to a mid-level job at a small local firm at $25 per hour. So she too is earning $26,000 per year, and both she and her husband are in the 30% tax bracket. Since Mary’s husband was laid off and he was not able to replace his former income in a new job, Mary does need to contribute to current household expenses. She is only able to save 10% of her after-tax earnings —or $1,820 per year. Since Mary and her husband have very little saved for retirement, we’ll assume she works for 15 years—until age 70—and her compensation stays the same each year. In this scenario, what will Mary have saved by age 70?

According to Gichon, Mary’s 15 years of working will generate approximately $40,000 for her retirement nest egg.

Nancy is obviously making a much larger contribution to her retirement savings, but Mary is easing her current household finances and still generating $40,000 in savings. This savings figure may seem low when many investment advisors often say that at least one million dollars in retirement savings is prudent—but the average 401(k) savings balance for Americans is only about $100,000. In both examples relatively low compensation figures are used to illustrate the point that big jobs and big salaries are not required to generate worthwhile savings over time. Many returning professional women have the opportunity to earn higher salaries over longer periods—and accumulate larger nest eggs as well.

In terms of retirement income Gichon went one step further to run some retirement numbers for Nancy. The $444,000 nest egg gives Nancy about $40,000 a year for retirement expenses (from age 65 to 92). For most retirees, an extra $40,000 per year will be put to good use.

One example would be unreimbursed medical expenses. Most people don’t realize they will need to fund a large amount of health care expenses not covered by Medicare. The $240,000 that a Fidelity study estimates as the out-of-pocket expense for a couple that retired in 2013 would be more than covered by the savings from Nancy’s back-to-work earnings.

The examples so far have focused on what women can gain by returning to the workforce. I asked Gichon for an example of the potential savings women forfeit when they leave the workforce at a mid-career point thinking they will return in a couple of years. In reality, a couple of years often turns into many more. Without considering how what I have seen as an average 12-year hiatus affects lifetime earning power, I asked Gichon to help me figure out the retirement savings value of the hiatus earnings loss.

In this example, Joan is a 35-year-old woman on the career fast track who has an income of $90,000 per year. She has one foot on the off ramp because her husband earns a lot more (putting them both in the 50% tax bracket), and she feels, at least for a couple of years, her family can live comfortably on one income. Joan lives and works in a city so she doesn’t have big commutation expenses. Her big expense is full-time daycare for a young child that is $1,500 per month (of course, child care varies widely, but that’s on the expensive end nationally according to quick research). So after paying taxes and childcare, Joan clears $2,250 a month.

Since Joan’s husband is a high earner, let’s assume that if she stays in the workforce she can save half of her take-home pay—or $1,125 per month. That’s a total of $13,500 per year in savings. If she actually stays out of the workforce for the average 12 years, she does not have the opportunity to save $162,000 during that hiatus period. Assuming a conservative 5% annual interest rate, that $162,000 would have grown to nearly $400,000 by the time Joan reached age 65. So if Joan gives up her job, she loses a substantial amount of compounded savings, enough monthly income to cover some household essentials—and, most of all, a great deal of earning power that will become an difficult issue when she wants to return.

In terms of long-term financial security, it’s wise for women to, as I say in my 9 Lives for Women blog, always “find the work that fits your life”.

This article is an excerpt from my upcoming book, “No Regrets: A Reality Check on Work, Motherhood and Long-Term Financial Security.” Share this article with all the women you know who are weighing the pros and cons of leaving the workforce or returning to work after time at home.

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