Consultant Feature Article, May 2004

Women and Retirement: What Every Woman Should Know
By Leslie Smith

Now that April 15 has come and gone, many of us will put away thoughts of saving for retirement for another day. The taxes have been paid, or the extension has been filed, and there are other more pressing deadlines. Client demands to meet, books to write, houses to remodel, and the juggling of lives personal and professional crowd out thoughts of saving. With this in mind, it seems a good time to revisit the unique financial challenges that women face—particularly independent consultants and business owners—and how our savings behavior today can impact our lives for the long run.

Women Face Unique Financial Challenges
Why should retirement savings stay near the top of the priority list? Let’s start with some relevant facts:

• On average, women retirees receive half the average pension that men receive.¹
• On average, women spend 11.5 years out of work while taking care of children or elderly parents.¹
• The average age of a widow is 56.¹
• Women live longer than men. By age 85, there are twice as many women as men. ¹
• Nearly all women (9 out of 10) will be solely responsible for their finances at some point in their lives. ¹
• While 21% of men have $100,000.00 or more saved for retirement, only 14% of women have an equal amount. ¹

Here is one more piece before getting to the good news. In the Centers for Disease Control, National Vital Statistics Report, February 2004, there is a comparison of average incomes for men and women with a bachelors degree or higher. Males averaged $53,457, while females averaged $33,366. That’s a difference of 38%.

Now Some Good News: Women Tend to Achieve Better Results
As a group, women seem to be better at investing than men. Several studies have shown that women investors outperform men by one to two percentage points. A study conducted by Terrence Odean, while an Assistant Professor at University of California, Davis, showed that women earned an average of an additional 1.4% per year. Sound like too little to be concerned about? Consider that an increase in your return of just 1% per year will increase your portfolio value by a whopping 20% in 25 years. Odean and his colleague, Brad Barber, attribute the difference to gender differences in trading behavior.

Men tended to trade more often than women. That’s why, in investment circles, you will hear the phrase "get invested and stay invested." Not only does trading increase costs, but there’s a greater likelihood that you will not be invested when the markets see an upswing, potentially reducing your long-term return.

More Good News: More Ways to Save
There’s more good news with regard to ways to save for retirement. There are more choices in retirement savings vehicles today than ever before. While some might argue that the choices of Roths, IRAs, SEPs Simple IRAs, Simple 401(k)s, Qualified Plans; Defined Contribution and Defined Benefit plans, can make it preferable for you to visit your dentist rather than your financial advisor. Competition is making retirement savings vehicles more accessible and user-friendly than ever before. Even the IRS has a user-friendly publication. Publication 560 provides the latest key retirement rules for 2003.

The Advantage of Retirement Savings
With all the intricacies of retirement vehicles and what investments to make within a retirement plan, it’s easy to forget the primary advantage of saving for retirement in the first place. TAXES. Or rather, saving money that would have otherwise been paid in taxes. Often your money goes to work for you pre-tax. Then the dollars that you save also continue to earn tax-deferred or, in the case of a ROTH IRA, tax free. What many people forget is that, as a result of your savings, you may have the same amount of spendable income and can invest for retirement what you otherwise would have paid in taxes.²

I recently overheard a business person saying they would pick up the tab for the group’s meal, since their accountant had told them they needed as many "write-offs" as possible. This was the same person who minutes earlier had said they wouldn't be opening a 401(k) plan for that year, because they needed to take home as much income as possible. Arguably, depending on their tax situation, they were making both sides of the same argument. As a general rule, when you save for retirement, you save money on taxes. In this person’s defense, this is an often-overlooked fact about retirement savings.²

Think Small. Contribute What You Can
I am reminded of a recent quote by Warren Buffet, the famed investor. "It does not take extraordinary action to achieve extraordinary results." There is not a more apt phrase when it comes to investing for retirement. When the maximum SEP contribution is the smaller of $40,000.00 or 25% of a participant’s compensation, many people feel like the small amount they might be able to contribute in a given year is irrelevant. Let’s take a look at why investing even a small amount can make a big difference.

These hypothetical examples illustrate two significant points. A relatively modest but consistent investment over time can create extraordinary results; and the sooner you start investing for retirement the better. There’s really a third point that many of you will observe as well. During the 90s, investors became accustomed to consistent double-digit returns. The last several years have brought about more realistic expectations for the long term. The example illustrates that you do not need to achieve extraordinary returns to achieve extraordinary results by retirement age.

Inflation Is a Stealthy Thief
We all know that even moderate inflation will have an impact on the dollars we have available to spend in retirement. The dollars we do save will need to go farther. What does inflation mean to us in everyday terms? What will we need to spend on a postage stamp, a cup of coffee, or a ticket to the movies? (On second thought, with the pace of technology, maybe stamps and movie tickets will go the way of the typewriter.) But here are some projections about the effect of inflation.

Sources: Specialty Coffee Association of America; US Postal Service; National Association of Theartre Owners. Data reflect prices from these sources a/o 12/03. Assumes a 3% rate of inflation.

Keep Saving for Retirement a Top Priority
The best way to prepare yourself for inflation and taxes is to make saving for retirement a top priority. Even a little bit of savings can add up in a big way.

• Do what you can today. Keep in mind that ordinary action of small, consistent investments can lead to extraordinary results.
• Confused by all the possibilities? Get help. The Employee Benefit Research Institute 2003 Retirement Benefit survey showed that investors got help from a myriad of resources: financial professionals, family, friends, co-workers, print media, seminars, and a small percentage from the Internet.
• The self employed face the additional challenge of sole responsibility for establishing a retirement plan. Realize its importance and seek professional guidance when necessary.
• Remember, it’s not how much you start with, or how much you earn; even small amounts invested consistently over time can lead to surprising results. Be good to yourself; make your retirement a priority.

¹ Sources: US Census Bureau, US Department of Labor, Women’s Institute for a Secure Retirement, National Center for Women and Retirement Research, Older Women’s League at www.owl-national.org, Kiplinger’s, Quarterly Journal of Economics.
back to list

² Consult your financial advisor and/or tax professional for results specific to your tax and financial situation. Results may vary. Historical returns are no guarantee of future returns. Tax laws are subject to change.
back to paragraphs

Leslie Smith is an independent Financial Advisor. As general securities principal, she has earned and holds five professional licenses through the National Association of Securities Dealers. Additionally, she maintains a California Insurance License. As a registered branch office of SunAmerica Securities/AIG Advisor Group, she has at her disposal a wealth of tools and information to determine the products and services most suited to the needs of clients. Her areas of expertise include retirement planning, investment management, life insurance, disability insurance, estate and college planning. Prior to becoming an independent financial advisor, she was a vice president of investments with BankAmerica Investment Services. She has provided family protection and wealth-building strategies for nearly 20 years. For more information, call her at 650-571-8132. She is a member of WIC. Find her past articles on the WIC Website.