Why Mothers Could Lose Up To $300K In Retirement Ft. Stephanie Pow | Lighthouse Financial

Why Mothers Could Lose Up To $300K In Retirement Ft. Stephanie Pow Episode 155

We welcome back Stephanie Pow, Founder of Crayon, to discuss the financial challenges faced by mothers due to the 'motherhood penalty', including the potential loss of up to $300,000 in retirement savings.

Quantifying the ‘Motherhood’ Penalty on KiwiSaver

The ‘motherhood penalty’ on KiwiSaver can be staggering, with potential losses reaching up to $318,000 for those exiting the paid workforce at 30, according to the NZIER report – see here.

Assuming a retirement age of 65 and an average life expectancy of 83.5, this translates to a substantial annual shortfall of $17,000 in retirement income.

Even a brief hiatus in contributions, such as a one-year break, can have a profound impact, estimated at $15,100 by age 65.

It’s crucial to acknowledge the multifaceted impact of:

  • Parental leave,
  • Returning to work part-time, and
  • Potential reductions in earnings due to limited career advancement opportunities.

Gender Disparities Amplified in KiwiSaver Balances

The disparities between men’s and women’s KiwiSaver balances are stark, with women’s balances averaging 25% lower, according to data from the Retirement Commission.

Motherhood significantly contributes to this gap, stemming from lower rates of labor force participation, increased career interruptions, and a propensity for lower-paid roles among women.

1st July 2024: Government Initiative on Parental Leave

Commencing on 1st July 2024, a significant government initiative will come into effect, aiming to bolster retirement savings for parents. Under this scheme, the government will introduce matching ’employer contributions’ on paid parental leave (PPL).

However, it’s imperative to note that opting into this contribution is essential, as the default setting is opt-out. Only 85% of primary carers presently contribute to KiwiSaver from PPL, signalling a need for greater awareness and engagement regarding retirement planning during parental leave.

Employer Engagement in Retirement Benefits

In response to the evolving landscape of parental leave benefits, employers are increasingly taking proactive measures to support their employees’ financial well-being.

Notably, many employers are now offering contributions equivalent to what employees would have received had they been actively working throughout the year. This approach ensures that individuals on parental leave do not suffer a loss in retirement savings, thereby promoting greater financial security for families.

Optimising Family Budget Contributions

In the pursuit of securing robust retirement savings, families are encouraged to explore avenues for bolstering their KiwiSaver contributions.

One effective strategy involves allocating a greater portion of the family budget towards retirement savings, particularly during periods of parental leave. By strategically allocating funds and maximising Member Tax Credits, individuals can augment their retirement nest egg significantly.

Notably, while the government offers a 3% contribution on PPL, which amounts to $555, it’s essential to recognise that additional contributions are required to fully capitalise on this benefit. Therefore, supplementing this with an extra $487 ensures that individuals harness the full potential of available incentives, thereby fortifying their financial resilience in retirement.

Adjusting Contribution Rates Pre and Post Parental Leave

Another proactive approach to enhancing retirement savings entails adjusting contribution rates before and after parental leave. By increasing contribution rates during periods of stable employment, individuals can capitalise on higher income levels and bolster their retirement savings.

Similarly, post-parental leave, revisiting and potentially elevating contribution rates can compensate for any temporary reduction in savings during the hiatus. This strategic manoeuvre not only mitigates the impact of career interruptions but also fosters a proactive approach to long-term financial planning, ensuring a secure and comfortable retirement for individuals and their families.

Conclusion and Key Takeaways

The financial challenges faced by mothers, as outlined in our discussion with Stephanie Pow, shed light on the critical need to address the ‘motherhood penalty’ and its profound impact on retirement savings. From the potential loss of up to $300,000 in KiwiSaver to gender disparities amplified by motherhood, it’s evident that concerted efforts are required to safeguard the financial well-being of mothers and their families.

Key Takeaways:

  • Optimise Retirement Contributions: Maximise employer contributions and personal contributions to KiwiSaver to mitigate the impact of the ‘motherhood penalty’ and ensure adequate retirement savings.
  • Plan Ahead for Career Breaks: Proactively plan for career breaks and parental leave to minimise the financial strain on retirement savings. Consider adjusting contribution rates and exploring alternative income sources during these periods.
  • Advocate for Policy Changes: Advocate for policies and initiatives that support equal retirement outcomes for women. This includes addressing gender pay gaps, promoting financial literacy among mothers, and ensuring access to affordable childcare and flexible work arrangements.

For a no obligation discussion to see how we can help you on the path to wealth, please contact us.

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