Blog | Personal Finance

The Real Reason Why Women Struggle in Retirement

The hidden costs of 401(k)s

Ladies, here’s some good news; we tend to outlive men. Now, here’s the bad news; we save less for retirement than men and most of us aren’t financially educated enough to know how to build a safe, secure retirement.

This remains true despite the fact that, as The Motley Fool writes, “The National Center for Women and Retirement Research reports that as many as nine out of 10 women will become solely responsible for their finances at some point in life.”

In the same article by The Motley Fool, writer Marie Backman praises women for “at least…[having] their priorities straight.” Even though they earn less and save less, more women do contribute to their 401(k) plans than men do. As Backman shares:

According to Vanguard's "How America Saves 2015" report, in 2014, 81% of women earning $50,000 to $74,999 participated in employer-sponsored plans, whereas only 62% of men in a similar income range did the same. And among those earning $100,000 or more, 91% of women participated in employer retirement plans, as compared to just 87% of men. In fact, women outsave men across all income levels.

Interestingly, Backman makes no connection that it might be this very devotion to 401(k) plans that is hurting women in the long run.

Why do I say that? One simple concept: compounding costs.

Most people are familiar with the idea of compounding interest, where earnings that are retained in an interest-bearing account also enjoy the benefit of earning even more interest over a sustained period of time.

But most people don’t realize that in many investment vehicles, especially mutual funds where there are fees charged whether you make money or not, there are also compounding costs that eat into your retirement savings. This video, “The Great 401(K) Caper: How $1 fee becomes $32,” produced for MSNBC, is a great introduction to the concept of compounding costs, and why they can be so damaging for retirement planning.

The conventional advice for women to do well in retirement is to double-down on your 401(k). The reality is that this is often bad advice that hurts you more than it can help you.

The key to success for women in retirement is not mindlessly putting money into mutual funds that degrade your returns with compounding costs. Instead, it’s time to rise up and increase your financial education. Start with understanding why 401(k)s are the worst way to prepare for retirement.

Thankfully, Rich Dad Advisor Andy Tanner is giving away his book 401(k)aos for free. Just visit his website, 401kaos.com, enter your email, and you can get a free PDF copy of his book. It will be an eye opener for you. I know it was for Robert and me.

And if you want to further your financial education, I encourage you to join the Rich Dad Community for free, as well as consider our education options.

If you want a safe, secure retirement, stop putting your faith in 401(k)s and start investing in your financial security by increasing your financial intelligence today.