Retirement is a major life transition for every person, however, there are unique considerations for women approaching retirement due to something known as the retirement gender gap. The retirement gender gap is a disparity in retirement savings and planning that can leave women at a disadvantage as retirement approaches. While there are several factors that contribute to this phenomenon, the retirement gap is primarily due to the longer life expectancy of women (80.1 years versus 74.8 years for men)1, combined with lower lifetime earnings, and is often exacerbated by a lack of confidence and expertise in the areas of budgeting and investing. Women are more likely to take on the responsibility of caring for children and disabled or elderly relatives, often leading them to work part-time or leave the work force, either temporarily or permanently. And, while women have fewer resources to save because of these lifestyle factors, they are also less likely to save than their male counterparts. Lastly, women are typically less-confident investors and tend to be more conservative when they do invest2.
These gender differences can paint a discouraging picture for women viewing retirement, but it is crucial for women to be aware of these factors when making choices about their retirement goals. In many instances, women manage the household cash flows but may not be the income earners. So as they approach retirement, women may not be aware of all the moving pieces — retirement assets, portfolio allocations, Social Security benefits, insurance, etc. Since 90% of women will end up managing their finances on their own at some point in their lives2, it is critical they be aware of the retirement gap, take an inventory of their financial situation, and then develop a plan to achieve their retirement goals.
For many people, the greatest risk to their financial plan is one within their control — spending — and for women this is an even greater risk given their longer life expectancy and subsequent higher living expenses. The first step in gaining control of spending is to create a budget. Once a basic budget is in place, it can be used as the foundation for creating a detailed plan for retirement. You can determine how much you need to retire confidently based on your spending needs and projected Social Security or pension benefits, coupled with appropriately managed portfolio assets.
A portfolio that is positioned to cover spending needs in the short-term (through cash and bonds) while also growing to cover future spending needs in the long-term (through stocks) will coordinate with your budget. Using this investment strategy to determine the appropriate asset allocation will allow the portfolio to favor capital preservation and provide peace of mind for current needs while also growing to cover future and uncertain expenses. For women, the proper balance is crucial as they tend to favor security yet face greater long-term risks (longer life expectancies and higher healthcare costs).
When it comes to investments, studies have shown that women approach investing differently than men. Women tend to invest more conservatively, trade less frequently (a good thing), and demonstrate a greater willingness to stick to a plan (another good thing). Based on these traits, women are actually well positioned for investment success when a plan is in place. However, in a recent survey, 57% of women reported a fear of running out of money — second only to a fear of losing their spouse3. Having a coordinated retirement plan and investment strategy goes a long way toward creating investor confidence and alleviating fear about the future.
While budgeting and investing are the most important steps to achieving retirement goals, women should also consider options to manage healthcare costs. Although many people choose to self-insure, long-term-care insurance should be considered to avoid drawing down assets for the health costs of one partner, leaving significantly reduced financial support for the surviving partner. If long-term-care insurance makes sense for a couple, it is more important for the man to obtain the coverage since women generally live longer.
Given the reality of the retirement gender gap, it is especially important for women to be informed and have a plan in place well in advance of retirement. Financial education can increase women’s confidence in their abilities to execute investment and money management decisions, while an awareness of the unique challenges facing women is critical to creating a solid retirement plan. Engaging a professional financial planner and investment advisor early on in this process can provide women with confidence and security throughout their retirement years.
1. “Women Face Unique Challenges When Planning for Retirement.” WISER. WISER, 15 March 2006. Web. 5 July 2016.
2. Spann, Scott, PhD, CFP, Gregory A. Ward CFP, Cynthia Meyer, CFA, CFP, ChFC, and Liz Davidson, CEO, Financial Finesse, Inc. “Study Finds 26% Gender Gap in Retirement Shortfall for Median 45-Year-Old Employees.” Press Release Distribution, EDGAR Filing, XBRL, Regulatory Filings. BusinessWire, 2015. Web. 5 July 2016.
3. Holland, Kelley “You Thought the Wage Gap Was Bad? The Retirement Gap’s Even Worse.” CNBC LLC. CNBC, 19 October 2015. Web. 5 July 2016.