Understanding the gender pension gap

What is the gender pension gap?

The gender pension gap is the difference in retirement income received by men and women.

In Canada in 2020, the gap was 18% - meaning that for every $1 a man received as retirement income, a woman (on average) received $0.82. According to the Organization for Economic Co-operation and Development (OECD), men are retiring with larger pensions than women in all 34 member countries, with the average GPG being 25.6%.

Why is there a pension gap in Canada? 

Ultimately, women are earning less money than men over what are typically shorter careers, often interrupted by breaks for caregiving. This means that women are contributing less to their pension pot, resulting in less money available when it comes time to retire.

Shorter careers 

Women often take time out of the workplace to start a family or to care for elderly family, and these career breaks can mean less time earning money that can be put towards retirement. OECD research shows that on average, women’s careers are 1/3 shorter than those of men.

Lower wages

Although they’re different, the pension gap and gender wage gap are deeply connected. In Canada, women continue to earn less than men, earning $0.89 to every $1. Smaller paychecks result in smaller contributions being made to personal and workplace retirement savings, while those in low-income employment may not be able to save at all.

Employment trends

The fact that there are overall fewer women in the workplace compared to men also contributes to the pension gap. According to the International Labour Organization (ILO), the difference between men and women in the workplace is 8.9 percentage points, and women are also twice as likely as men to work part-time.

Not paying into workplace pensions

According to Statistics Canada, there were 6,593,256 active members of a Registered Retirement Plan (RRP) in Canada in 2021 – or 27.5% of the total working age population. Although this number includes women, lower wages can translate into lower contributions into an RRP – and it also means that over 70% of the workplace population isn’t saving for retirement through work.

How you can prepare for retirement

With all of this in mind, it’s especially important for you to plan for retirement – since as we know, many retired women are struggling as a result of not having saved enough.

According to Statistics Canada, women are an increased risk of living in poverty in old age; in 2020, the number of women aged 65 to 74 living with low-income status was 14.2% compared to 12% of men. This number increases to 21% in women over 75 years of age.

Luckily, there are several things you can do in your working years to help close the pension gap and save enough for your dream retirement.

Start saving sooner

Nothing helps your savings grow quite like time. The earlier your start saving, the more time your money as to grow and benefit from compound growth and interest.

With compound interest, you’re essentially earning interest on interest – you earn interest on your original and following investment contributions, plus on all the interest that has built up over time. This gives you a larger balance to earn future interest on, leading to even bigger returns.

Make sure to look at high-interest savings accounts such as a registered retirement savings plan (RRSP) and tax-free savings account (TFSA), both of which can help you to grow your money for retirement.

Know the 3 pillars of retirement income

The money you contribute to these and other savings accounts make up just one source of your retirement income. In Canada, there are the so-called “3 pillars of retirement” – government benefits, contributions to a workplace savings plan and personal savings. Making sure you understand how all three of these retirement income pillars work together can help you save for retirement.

Government benefits

Throughout your working life, you’ll contribute to the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). You’ll be eligible to receive this pension when you retire, along with other benefits like the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) if you meet the criteria. Studies show that women are more reliant on government benefits in retirement than men, which is why it’s important to ensure this isn’t your only form of income when you stop working.

Workplace savings plans

As part of your benefits package, your employer may offer some kind of retirement savings plan. This might be a pension plan that pays you an income when you retire. Increasingly, it might be a workplace RRSP, which you can convert to a RRIF or LIF in retirement, allowing you flexible income with growth potential. In some cases, your employer will match your contributions to a pension or workplace RRSP, up to a certain percentage. Do your best to maximize your contributions to this – otherwise you’re essentially leaving additional savings on the table.

Personal savings

This is a broad category that can include RRSPs and TFSAs, Locked-in Retirement accounts or locked-in RRSP’s (formerly money that was in a pension plan). When you retire, you'll need to turn these savings into income. To do that, you could purchase an annuity – a lump-sum payment that guarantees you a certain amount each month – or explore other ways to keep growing your capital, like keeping some money in a tax-deferred RRIF or TFSA.

Make a retirement plan

While retirement may seem a long way off, it’s never too early to start thinking about what that chapter of your life may look like.

Picture your dream retirement – do you see yourself living an active lifestyle filled with exercise, hobbies or travel? Or do you envision yourself relaxing and enjoying a slower pace of life? Do you plan to retire in Canada or abroad? What age would you like to retire? Do you see yourself stopping work altogether, or could part-time work or “semi-retirement” be in your future?

Once you have an idea of what your dream retirement looks like, now you can start to plan how you’ll pay for it.

Create a retirement budget

As you transition into retirement your income and expenses will change.

That’s why it’s important to create a new budget for your expenses using your estimated monthly income total in retirement.

The general thinking is that you’ll need 70 to 80% of your current salary to maintain a similar lifestyle in retirement. That means if you made $100,000 each year, you should plan to have $70,000 to $80,000 in retirement income, for example.

The logic is that typically you will spend less as a retiree – you’re not commuting, for instance, your bills might be lower because you’re in a smaller place, you’re likely not supporting a family anymore – and so you will need less each year while still being able to live the way you’re used to otherwise.

Do this calculation for your situation by looking a snapshot – one month of bills, perhaps – and subtracting the expenses that you won’t have when you reach that stage of life. That said, remember to factor in new expenses you might have. These could be discretionary things like travel or new hobbies. However, it should also include potential scenarios like increased medical costs, help at home or the expense of moving into more supportive housing.

Understand how to pay yourself in retirement

Having retirement income options is great, but how do you get the most out of them?  

It’s not as simple as just taking the money out of your investment and savings to spend. When you begin transitioning from saving to income there are important strategies to be aware of that can help you maximize your money and reduce the taxes you have to pay. 

I can help you get the most out of your savings, answering questions on topics like: 

• When to withdraw from an RRSP
• Tax-efficient withdrawal strategies
• Converting your RRSP into a RRIF
• RRIF withdrawal rules and rates
• When you can unlock a LIRA
   

You can continue to grow your money in retirement

Just because you’re retired, doesn’t mean you can’t lay the groundwork to continue investing and building your portfolio.

It’s important to examine your retirement income and make sure you have enough set aside for investing and saving. By attempting to grow your money during retirement, you’ll potentially put yourself in a better position to do all those exciting things you’ve been looking forward to for a long time.

Investing in something like a segregated fund policy that offers you guaranteed protection and the potential for growth could be a good option. You could also look at combining segregated funds with an income annuity to give you a regular source of income in retirement. 

These options can help protect your investment from market fluctuations.

What’s next?

• Some research has shown that the pension gap is closing, narrowing by 15 percentage points in Canada over the past decade.
   
• With that said, actively planning for retirement, learning about how much to save and how to grow your money can help improve retirement outcomes for women.
   

If you have questions about saving enough for retirement, I can help.