As a career coach women frequently tell me it doesn’t really matter if they leave the workforce “because I’m not earning a big salary.” Similarly, many women stay out of the workforce because they don’t think the salary they could generate is enough to warrant time away from home. In both cases, it’s shortsighted to think only a certain salary makes it “worth it” to work.
I see the origin of this thinking. When women do the math—adding up expenses like commuting, childcare and maybe extra household help—the amount they’re left with can appear to be an insignificant drop in the bucket for college, retirement or other big expenses. I’ve seen many women wrestle with decisions about continuing to or returning to work, but often higher-earning partners step in with the closing argument: “Once your smaller salary is taxed in my bigger tax bracket, it just doesn’t make sense for you to leave the house.”
The fact is, though, that it indeed makes long-term sense for women to earn a professional salary of any size: to invest valuable time into future earning power, build resumes, expand their portfolio of marketable skills, and earn money that can be invested and saved. Women who have “all or nothing” attitudes about high compensation aren’t thinking broadly about saving and investing.
Financial advisors tell me that many well-educated women don’t consider how the power of compounding increases even small savings over time. Here’s a quick explanation.
The Power of Compounding
The power—or magic—of compounding is the snowball effect of earnings continually generating even more earnings. You receive interest not only on your original investments, but also on any interest dividends and corporate gains that accumulate, so your money grows faster and faster as years go by. This is particularly powerful in 401(k) and IRA retirement accounts, where principal grows for years tax-deferred or tax-free.
The more you save, the more your nest egg grows over time. Even saving a small amount can greatly impact your ability to fund life’s unexpected challenges and a long retirement.
Here’s an example. Nancy returns to work at age 45. She doesn’t want a big corporate job, so she takes a flexible, part-time (20 hour per week), mid-level job during school hours at a small local firm. She earns $25 per hour, or $26,000 per year, and her husband’s earnings put them in the 43% state and federal tax bracket (the highest federal tax bracket of 37% plus a 6% state tax rate, which is about mid-range in most states).
Since Nancy’s earnings are not needed for current household expenses, she can save all the money she clears after taxes. To keep things simple, let’s say she works for 20 years and her compensation stays the same. If she socks away her take-home pay, what will she have saved by age 65?
For the answer, I consulted Galia Gichon of Down to Earth Finance, a financial advisory firm for women. If Nancy clears $14,950 after taxes per year, and she invests that full amount in, say, a Moderate Balanced Allocation Mutual Fund with a conservative return of 5% for 20 years, she’ll have savings of $519,000 at age 65. That’s more than half a million dollars in savings from a moderate-stress job during school hours and close to home.
In terms of retirement income, the $519,000 nest egg gives Nancy about $40,000 a year for retirement expenses (assuming a conservative 5% annual interest rate and savings compounded 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. The $404,253 out-of-pocket healthcare expense estimated for a couple who retired in 2017 could 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 or staying in the workforce. Gichon then addressed the potential savings women forfeit when they leave the workforce at a mid-career point.
In this example, Joan is a 35-year-old woman on the career fast track who has a full-time income of $90,000 per year. She’s considering a work hiatus to spend more time with her young child.
Joan feels she can leave the workforce because her husband is a higher earner (the couple is also in the 43% tax bracket), and she feels that, for a couple of years, her family could live comfortably on one income. Joan’s biggest work-related expense is full-time daycare at $1,500 per month. So, after paying taxes and childcare, Joan clears about $2,813 a month.
If Joan stays in the workforce she can save half her take-home pay—or $1,406 per month. That’s a total of about $16,875 per year in savings. If she actually stays out of the workforce for the average 12 years, she gives up a total of $282,032 in compounded savings (again assuming a 5% interest rate) that could have been generated in that period. Over 30 years (from age 35 to 65) Joan’s savings could have kept growing—giving her a final total of $1.3 million in savings. So, if Joan gives up her job, she loses a huge amount of money—and, most of all, a great deal of earning power that could be difficult to recoup.
The ability to keep skills current and earning power growing, the long-term financial security from even small compounded saving and investing, and personal fulfillment are all good arguments to always keep your status “employed.”
This article is an excerpt from the book Ambition Redefined: Why the Corner Office Doesn’t Work for Every Woman & What to Do Instead. Author Kathryn Sollmann is also a career coach and speaker who encourages women to always find the professional, flexible work that fits their lives for long-term financial security.