Investing Skeptically is an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice, legal advice or tax advice. If you are in the need of financial advice please contact Polaris Financial Planning. (Polaris Financial Planning LLC, is a “fee-only” registered investment advisor and does not receive money from anyone other than the paying clients.)
Young adults in the US have very low rates of financial literacy and only four states require a class on personal finance in High School. When I give talks about investing I am often surprised by people of all ages that know very little about investing. If you don't know how the system works it can be very hard to succeed.
This can make investing difficult for the average American but, women have some additional challenges and that is the point of this post.
Lower Wages
Data continually suggests that women make less than men. Based on data from the Bureau Of Labor Statistics...
...in 2010, women’s earnings were 81 percent of men’s.
Forbes (the online magazine) makes the argument that the actual gap is only 13.5% not 19%. It is an interesting way to look at it but the result is that women DO make less and are likely to make less in the future. I don't want to have a deep philosophical discussion about why this is but, this is the case. Saving money is harder if you make less of it.
Longer Life Expectancy
Women tend to live longer than men. Based on data from the CDC women should expect to live about 5 years longer than men. Of course, it is great to live 5 extra years but, you don't want to run out of money.
Lower Financial Literacy
Lower income and longer life create a challenge but according to FINRA women also know less about investing. (FINRA, the Financial Industry Regulatory Authority, is an independent regulatory organization empowered by the federal government to ensure that America’s 90 million investors are protected.)
Women consistently score lower than men on measures of financial literacy, and this gender-based gap can negatively impact the financial well-being of women. For example, financial literacy has been linked to several outcomes, including wealth accumulation, stock market participation, retirement planning...
FINRA's conclusion is based on research performed on RAND Labor and Population data. Here is the study....
Here are a few highlights of the report.
Women tend to live longer than men, have shorter work experiences, lower earnings and levels of pension or survivors’ benefits.These factors put women at a higher risk than men of having financial problems and of approaching retirement with little or no savings.
A contributing factor to low wealth levels of divorced women compared to men near retirement may be a lack of adequate financial literacy.
There is a burgeoning literature documenting low levels of financial literacy population-wide and the relationship between literacy and savings behavior.The financial literacy index for women is about 0.7 standard deviations lower than for men (p < 0.01).
Conclusion
These factors can all compound and result in the premature depletion of retirement funds for women.
Examples
Let me give two examples and make a couple of little graphs. (Note: These are just theoretical examples and oversimplify reality)
The first example is for a theoretical man:
- starts investing today at age 22 and retires at 62.
- income $60,000 per year. (while working)
- saves 10% ($6,000 per year).
- Makes a 10% return per year while working.
- changes to a more conservative portfolio in retirement, making 8% per year.
- He collects $18,000 per year from Social Security in retirement and another $42,000 from his investments. (total of $60,000)
- His funds last until to age 108 - long past his expected life span of 76. (note: inflation is assumed to be 3% and income numbers at retirement are adjusted by this factor)
The second example is a theoretical woman:
- starts investing today at age 22 and retires at 62.
- income $54,000 per year. (10% less than the man - actual difference is likely greater)
- saves 9% ($4,860 per year) (Low financial literacy often leads to lower savings)
- Makes a 9% return per year while working. (Low financial literacy often leads to lower savings)
- Changes to a more conservative portfolio in retirement, making 8% per year.
- She collects $16,200 per year from Social Security (Her SS is lower because it is tied to your income and she made less) in retirement and another $37,800 from her investments. (Note: She only trying to match her working income of $54,000 not the $60,000 the man enjoys)
- Despite her smaller withdrawals, the funds only last until to age 77 - short of her expected life span of 81. After age 77 she will have to live on just the Social Security of $16,200. (note: inflation is assumed to be 3% and income numbers at retirement are adjusted by this factor)
What to do?
Get a financial education and higher a "Fee Only" Financial advisor.
I would start with the book "Common Sense On Mutual Funds" by John C. Bogle. It has a little math but you can handle it. Mr. Bogle is a financial genius and founder of the Vanguard Mutual fund company. (NOTE: I do not get ANY payment or commissions from Vanguard )
You can also pick up magazines like Kiplinger. I would not follow any of the specific advice that they give but it will help you learn the language. This will help you make better choices.
If you need any other ideas or suggestions let me know.