By Gail MarksJarvis, March 19, 2022 10:03 am ET
When the pandemic hit in 2020 and shut down schools, Samantha Goodman decided there was no way to work and care for her son, now 6. So for two years she gave up on having a job or saving for retirement.
Now the Chicago mother is among a wave of parents, mostly women, who’ve gone back to work or are looking to do so as the pandemic eases.
Staying home was a distressing choice, she says, so she quickly searched for a job to make up for more than two years of lost paychecks and 401(k) savings as soon as schools reliably opened. “You wonder all the time if it’s the right decision. Lifetime finances were always in the back of my mind,” she says.
Although Goodman worries about the long-term impact of relying primarily on her husband’s income as a data engineer, she accepted only a six-month part-time data analytics contract in February—afraid of locking herself into a full-time job if Covid closes down schools again. There still is no 401(k) and the pay is small compared with what she hopes to make once pandemic threats clear, but for now she is willing to accept the trade-off.
Economists have long found what is known as the “motherhood penalty” for women who leave jobs, or cut back on work, to care for children. Besides losing pay while away from work or reducing hours, there can be substantial long-term financial sacrifices: lost opportunities for advancement, raises stunted because they build on low early-career salaries, and compromises in retirement since lower pay reduces Social Security, pensions, and the ability to save in 401(k)s and individual retirement accounts.
Financial professionals say there are a number of steps to mitigate the impact of the motherhood penalty, and a large body of economic research provides insight for millions of women with similar concerns as they debate when to go back to work.
The impact is harsher on single women than married women, who can get the benefit of a husband’s earnings and savings. Married Americans have twice the average assets as divorced or never-married people as they near retirement, according to research by University of Virginia sociology professor W. Bradford Wilcox. Using the National Longitudinal Survey of Youth in 2016, he contrasted the average assets of $640,000 for 51- to 60-year-old married people with $167,000 for divorced or never-married singles.
Even married women, however, can feel the motherhood penalty in retirement because women typically live longer than men. About half of married women need savings to last until 90.
The Penalty’s Toll
Estimates of the motherhood penalty have ranged from $161,000 to $600,000, notes Cindy Hounsell, president of Women’s Institute for a Secure Retirement. But the actual impact depends on how much time a woman stays home or reduces work hours, why she left a job in the first place, the number of children, her occupation, whether she cuts back on work again to care for a parent or family member, and the economic climate when she re-enters workforce.
The recession of 2007-09 was brutal on people looking for jobs. In a 2018 paper, economist Marta Lachowska, of the W.E. Upjohn Institute for Employment Research, says that five years after losing a job in that recession people were earning 16% less than those who had continually worked. Other studies, not focused on the recession, have reported average motherhood wage penalties ranging from 5% to 10% per child among women in their 20s and 30s.
Men are typically spared from a similar financial impact as women because few leave jobs for long to be a stay-at-home parent. A Minneapolis Federal Reserve paper notes that “nearly all fathers” who disrupted work early in the pandemic returned to work quickly, “while mothers regained virtually none of their lost ground.”
Apart from the pandemic, economist Matthew Rutledge of the Center for Retirement Research at Boston College has found that mothers with one child have lifetime earnings 28% less than childless women and that each additional child lowers lifetime earnings by 3%. Mothers with one child receive 16% less in Social Security than nonmothers, and each additional child reduces benefits by an additional 2%.
To understand the possible forces on a lifetime, Rutledge considered for Barron’s a hypothetical 30-year-old woman who was making roughly $61,000 a year when the pandemic hit, had been working since leaving college at age 21, and had been saving 9% of pay in her 401(k) each year. By that point she had accumulated almost $50,000 in her 401(k).
With a child out of school in the pandemic, this woman leaves her job and stays home for four years, earning nothing and saving nothing for retirement. When she goes back to work, she earns $53,000 a year—an 8% penalty for each year away from work. If she had stayed employed and received 3.5% annual raises, she would have been making $72,000.
At retirement, the woman who temporarily left her job will have roughly $1.1 million in her 401(k) rather than the $1.5 million she would have had with a continuous job and a 6% annual return on her retirement investments. Her Social Security will total roughly $168,000 if she lives to 90, instead of the $198,000 she would have had without an absence from work.
Rutledge calls this outlook for 401(k) and Social Security benefits optimistic because it assumes that the woman is able to get right back into a job with a 401(k), and that she keeps working until starting Social Security at 67.
How to Play Catch-Up
“This doesn’t mean you shouldn’t be home with children if you think they need you,” said Sheryl Garrett, a financial planner and Garrett Planning Network founder. “But it also doesn’t mean to ignore what it means now or for your retirement later.”
Financial pros say there are a number of ways women who find themselves hit by the motherhood penalty can play catch-up. If a woman is married and her spouse is working, as much as $6,000 a year can be put into a Roth IRA or traditional IRA on behalf of the wife even if she is not working and has no access to a 401(k), Hounsell says. When a woman goes back to work, she should make retirement saving a priority, she adds.
Divorced women also should be aware that if they were married for at least 10 years before divorcing, they will be entitled to spousal Social Security benefits in retirement. Based on their former husband’s lifetime earnings, these benefits usually are higher than Social Security for women who took time from work for children or caregiving.
Women should also consider working longer to boost their own Social Security and retirement savings. A study by Stanford economist John Shoven found that retiring at 66, rather than 62, allows a person to lift their standard of living by a third.
And individuals over 50 can turbocharge their retirement savings by stashing as much as $27,000 in 401(k)s, instead of the $20,500 limit for those under 50, or $7,000 in a Roth or traditional IRA, instead of $6,000.