Unfortunately, women’s strengths don’t erase the challenges they may face when it comes to money.
Mothers and caregivers often have to take lengthy leaves from their careers to care for kids or aging parents, lowering their contributions to employer-sponsored retirement plans and costing them years of the company match.
Living longer, they may outlast their funds or spend more time ill. They may also err too far toward risk avoidance. As a result, they need strategies that complement the strengths noted above and offset several distinctive problems:
Start early. To reap the rewards of their patience, women should plan ahead and accumulate enough cash to invest. That means maximizing contributions to a 401(k) early.
Even a small monthly amount, done early and steadily, makes an extraordinary impact a lifetime later. Unfortunately, studies show that most don’t start saving early enough. In other words, it’s very important to have a conversation with your Financial Advisor early.
Don’t be too risk averse. While their prudent, well-informed approach can help protect women from losses, being too cautious can prevent women from achieving the growth they need. One study showed women leaving 20% of their assets in checking accounts.11 They can also often be too busy balancing family and career to take time to rebalance their portfolios or review their assets. Insufficient diversification — leaning on CDs, shunning equities and relying too heavily on less risky bonds — may limit the potential to generate sufficient income from a portfolio and allow inflation to reduce the portfolio’s purchasing power over time (and, given women’s longer life spans, the long term is critical). Over the long term, shunning stocks in favor of bonds can mean a portfolio isn’t properly diversified and so may not combat the eroding power of inflation.
Offset your challenges. Shifting into part-time or flextime work to be caregivers can result in missed opportunities to save and lower Social
Security benefits. But there are smart, preventive steps to take. Setting up tax-advantaged retirement accounts and adding to them yearly, regardless of work status, can make a significant difference. Part-time workers can open and fund individual retirement arrangements (IRAs); the self-employed can take advantage of Simplified Employee Pension (SEP) IRAs. Married women with no income may be eligible for a spousal IRA, set up and funded by their partner. It’s often sensible, after leaving a company, to roll over 401(k) funds to a rollover IRA, which makes asset management easier and generally offers broader investment choices.
Finally, for women whose current employment puts them in a lower tax bracket, converting regular IRAs to Roth IRAs could make sense. Roth IRAs are taxed now (not later) and have the potential to grow tax-free. Qualified withdrawals during retirement are tax-free. You should consult your tax advisor before making these decisions.
Be prepared. Women’s admirable sense of realism is not all-encompassing: They can fail to factor the cost of a longer life into their financial strategy. The Social Security Administration says U.S. women outlive men by five to seven years; those reaching 65 can expect to live an additional 20 years.12 Living longer means potential for increased medical costs: The Employee Benefits Research Institute says a woman retiree of 65 may need $242,000 in savings for health care, insurance and other health expenses (if she has no company, military or union plan).13
It’s a common misconception that health insurance and Medicare will pay for assisted living or a nursing home, but that’s usually not the case. That makes it important for all investors, especially women, to consider whether long-term care insurance might make sense. Studies show that most women hope to pursue travel, hobbies, philanthropy and generational bequests,14 and having savings in place frees them to do so. They should also consider guaranteed-income insurance products such as annuities, which involve paying a premium in a lump sum or installments in exchange for a guaranteed income stream in retirement. And they should defer taking Social Security payments as long as possible, since deferring increases the payment. Finally, they should explore, if a spouse has a pension, adding survivor benefits to the policy.
There’s little doubt that women’s financial behavior and preferences across situations show major differences from men’s. Women’s financial strengths are significant, but so too are their challenges. In the end, this type of careful and informed approach to investing and saving, when coupled with early planning and forethought, can offer a powerful example that all of us could use to better control our financial destiny.
