Sinkorswim

03/02/05 - Retirement Planning For Women

By: Investor Solutions, Inc.

Different Than Planning for Men?

When it boils down to fundamentals, planning for women is not much different than planning for men. After all we share common goals: wealth maximization, risk minimization and cost containment. Both ought to strive for an optimal investment mix and both should start investing for retirement at an early age to take advantage of compounding. So, with regard to investing, there is no difference between genders and there is no special need that women have. Yet, unlike men, women face many unique issues that most men don't. Here are the challenges (and solutions) that we need to consider:

Longevity

One of the challenges that women face in terms of retirement planning is our extended lifespan. On average, women outlive men by 7 years (mortality for women is 79 years vs. 72 for men). Many women are faced with caring for their husbands later in life, but after his death they may be left with no one to care for them. Because of this, women's health care needs will likely be substantially higher than men, making it much more expensive for us to live longer.

What does this mean? It means we may not only need to consider products like Long Term Care insurance, but we also need to have much more money in the retirement pot than men in order to not outlive our funds. Unfortunately, the challenges that follow are even greater.

Earnings Disparity

As little as I'd like to admit it, it's no secret that men out earn women. Of course, this is true in general terms, and may not be true in all cases. But most statistics will tell us that the "gender income gap" is persistent and well-documented. In fact, he Labor Department claims that women earn only 76 cents for every dollar earned by a male counterpart in the same occupation. And although the gap is shrinking, women are forced to play catch up with their retirement nest egg, as compared to men.

So assume that each gender saves the recommended 10%-15% of earnings over their working years. Dollar for dollar the male will accumulate a larger nest egg and at a quicker pace than the female. The differences in earnings rates between men and women are difficult to explain, but I suspect that as long as women are responsible for child birth and primarily responsible child-care, this differential will likely continue.

Women have to make a conscious effort to take charge of their own retirement planning early on in their careers. And while we can't change the facts (men earn more than women), women can try to (partially) overcome their retirement challenge by saving a higher percentage (aim for 15% to 25%) of their gross income as compared to men. My advice to all women is to max out their contributions to qualified retirement plans and IRA's in addition to using some portion of disposable income toward after-tax investments.

Maternity and Benefits

Being a woman is a blessing, no doubt. As women, we get to experience biological miracles that men will never be able to imagine. But our biological blessing can be a double edged sword when it comes to money. Here's why:

Most women leave paid employment for at least a short time after having children, and many leave for a substantial period of years. Some women may never return to the work force and others that re-enter the workforce may be forced to start their careers all over again. These gaps in a woman's earnings history may result in lower Social Security and/or pension benefits. Unlike men who receive higher pension benefits because they've worked steadily throughout their career.

In fact, the vast majority of men have 35(+) years of substantial earnings by the time they reach 62. Conversely, only a minority of women today has such consistent earnings. Here is how the benefit calculations work. If a worker has fewer than 35 years of cumulated earnings, Social Security requires that zero years be included for those years that the individual did not work. So, let's say a woman has only 25 years of lifetime earnings, her retirement benefit is computed using those 25 years plus 10 zero years. This number is then divided by 420 to determine the AIME (averaged indexed monthly earnings), which reduces the average benefit. This problem affects very few men.

Here are some frightening statistics to consider:

• For every year a woman stays home caring for a child, she must work five extra years to replace lost income, pension coverage and career promotion.(The National Center for Women and Retirement Research, 1997)
• A woman who takes seven years off over a 40-year career can expect to receive one-half the pension benefits of someone with 40 years of uninterrupted service.(Money Magazine , July 1997)

Investment Responsibility

Unfortunately, most women still defer the investment responsibilities to their husbands. Dreyfus and the National Center for Women and Retirement Research conducted a study in 1997 which found that 33 percent of female investors avoided making decisions out of "fear of making a mistake" versus 22 percent of male investors. As a consequence of this fear, women often defer financial decisions and money management to the men in their lives. (Journal for Financial Planning, 2000)

I can attest to that. In our investment practice, I've encountered far too many women that have never taken the time to learn about investing because they've:

• been too intimated by the process
• lacked the interest or
• suffered from the "Prince Charming effect"expecting to be "taken care of" by their current (or future) husband.

Yet, in the face of a crisis (death/incapacitation of a husband or divorce), too many women are forced to abruptly take the financial reins, leaving them ill prepared to handle their own economic affairs.

The National Center for Women and Retirement Research claims that the average age for a woman to be widowed is 56. And the U.S. Census Bureau claims that at some point their lives, 9 out of 10 women will be solely responsible for their financial affairs. With statistics like that, I can't understand why any woman would relinquish participation in her financial future. There are no excuses, women need to become informed and get involved. I don't care if you are single, engaged, married, widowed or already working with an advisor it's your future - shouldn't you be an active participant in the financial decisions?

The Good News

Despite all of these negative statistics I've just discussed, there is one positive regarding women and finances. Once women begin to invest, they actually tend to fair better than men! A behavioral finance study conducted by Terrance Odean (professor at University of California) concludes that men's overconfidence and hyper active trading actually results in lower investment returns as compared to women. Women tend to be more conservative (investing for preservation AND growth) while men invest for growth.

A behavioral finance study conducted by Terrance Odean (professor at University of California) concludes that men's overconfidence and hyper active trading actually results in lower investment returns as compared to women. Women tend to be more conservative (investing for preservation AND growth) while men invest for growth.

As a result, women turn over their portfolios an average of 53% a year; while men's portfolios turnover at a rate of 77% a year. This excessive trading leads to lower performance. Here's what Odean found: married women actually get better returns than men -- 1.4 percentage points better, and single women did even better -- 2.3 percentage points a year over single men.

Conclusion

So, what can we learn from this and how should women plan any differently for retirement? From an investment design perspective, we've established that women are no different than men. Every one of us ought to own a globally diversified portfolio designed to capture global market returns and minimize portfolio risk. But when building a nest egg, ladies need to make some slight adjustments.

First, we have to get informed and get involved. It's nice to believe that our prince charming will forever take care of us, but the fact is, at some point in our lives, we're on our own. So, it's better to be actively aware of your finances and investments long before you might be forced into crisis mode. Second, we're not going to stop having babies--why should we?! Yet this means we spend a lot less time in the workforce as a result of our biological gifts and to add insult to injury we're paid a lot less. How do you counter that? You save more & lots more! Finally, believe in yourself. Investing does not have to be a mystery and we've already established that women make better investors than men. So, as the Nike ad proclaims& "just do it". Your future depends on it.

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