Tackling the Investment Gap

InspireHer: Plancorp Women’s Initiative | Investment Strategy

 Sara Gelsheimer By: Sara Gelsheimer

We’ve heard a lot about the wage gap in the last decade or so, but the investment gap is just starting to get more press. Despite the fact that more and more are identifying themselves as their family’s primary breadwinner, bill-payer and budget-maker, women continue to lag behind men in long-term financial planning and investing.

Women generally are more risk-averse and don’t get caught up in the “competition” of investing like some men do. They also tend to be less numbers-driven from a performance perspective, focusing more on how their planning helps them reach their goals for their families. So, actually, women are often better investors than men; they just aren’t investing as much. 

Knowledge is power, and it’s one of our goals to foster financial confidence in women through our InspireHer initiative. In that spirit, I wanted to share a few statistics I found particularly compelling in a recent Transamerica study. They’re quite telling of the state of the investment gap, and they also make good conversation starters for a number of financial planning topics I regularly discuss with my clients.

1. Pay yourself first, and automate those savings.

Women are great at putting others first. But with the majority of caregiving falling on women, more than half of those surveyed said they plan to work after age 65 or never retire at all.

Remember: your kids can get loans for school, but you can’t get a loan for retirement. When it comes to finances, it’s important to “pay yourself first.” Start by saving as early as possible, creating a reverse budget, contributing to your company’s retirement plan and automating savings from checking into investment accounts.

2. Work toward a financial plan tailored to your goals.

Everyone wants to be successful in retirement, but how do you know what success looks like if you never define it? When asked how much they thought they’d need for retirement, the median answer of women surveyed was $500,000—and 55% admitted that was a complete guess.

There is no “magic number” everyone needs set aside for retirement, because it’s so heavily based on your personal goals and vision for retirement. That’s why it is so important to work with a financial advisor who can build a plan for you around your goals, considering questions such as:

  • When do you want to retire?
  • Do you want to sustain your current lifestyle in retirement or a better lifestyle?
  • Do you want to travel?
  • Do you want to gift money to your kids while you’re alive?
  • How do you want to leave a legacy?

Based on discussions like these, your advisor can tell you how much you should be saving and whether or not you’re on track. 

3. At a minimum, contribute enough to your company’s retirement plan to get its match.

If you’re contributing any less than what your employer will match, you’re leaving money on the table. After that, the percentage you contribute depends on the lifestyle you envision for retirement. (According to the Transamerica study, the median was 7%.)

The important thing is to start early, so you can let compounding interest work for you. For example, if you are 25 years old and invest $200/month until you retire at age 65, you’ll have over $520,000 at retirement (assuming a 7% rate of return).  If you wait until age 40 to start saving, that number at retirement is only $160,000. By increasing your contribution rate every year, you create even more opportunity for growth. 

4. Take risks—but make them smart.

To increase your return, you generally need to increase your risk. There are, however, smart ways to do so.  For example:

  • Taking on more risk in equities generally yields greater returns than a risky bond portfolio. Keep your bonds short-term and high quality (they should be in your portfolio to reduce volatility) and take your risk on the equity side where the payoff is much greater.
  • Be sure to invest in a well-diversified portfolio made up of thousands of companies inside and outside the US.
  • Don’t put “all your eggs in one basket” by investing in single stocks. There is no reason to subject a large portion of your assets to the risk of one company going out of business.

5. Don’t underestimate a good tax strategy.

You might be surprised at how much impact your tax strategy can have on your investing goals. A quick discussion with your advisor could save you thousands each year, which leaves that much more money in your portfolio to compound.

  • 401(k), Traditional IRA or Roth IRA? - Saving into a 401(k) or Traditional IRA reduces an individual’s ordinary income during the year of the contribution. A contribution to a Roth, however, does not provide a tax benefit up front, but allows your money to grow tax-free. So once withdrawn from the account in retirement, the withdrawals are not taxable (versus withdrawals from IRAs/401ks which are taxed as ordinary income). So, if you think your income will higher in the future, it is beneficial to save into a Roth now.
  • Gifting Stock - Many women are charitably inclined. One option is to give shares of stock or mutual fund, which has appreciated in value, directly to a charity. This frees up current cash flow, and it allows the stock to be liquidated without paying capital gains tax (the charity can sell the stock and pay no capital gains tax).
  • Charitable Giving and the New Tax Law – Fewer people will now itemize their deductions (and thus not receive a benefit for a charitable contribution). For those age 70 ½ and older, they can gift part of the required minimum distribution from an IRA account (up to $100K) to charity, and thus reduce their ordinary income for the year. 

Because women tend to outlive men, save less, and take on less risk, we have a steeper hill to climb to live an ideal retirement. A good financial advisor (who acts as a fiduciary) can help quantify goals, make recommendations about savings targets and investment allocations, and hold you accountable.  While you’re looking out for everyone else, a good financial advisor will be looking out for you, helping you close the gap. 

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Sara came to Plancorp in 2013 with a strong financial background and an even stronger commitment to financial education—particularly for women. A Wealth Manager and Founder of InspireHer (Plancorp's Women's Initiative), Sara is also a new mom. More »