Happy National Women’s History Month! This month we want to take the time to celebrate the numerous accomplishments and contributions of women throughout history. With each passing year, women continue to break more barriers and shatter more glass ceilings than ever before. For our part, ML&R Wealth Management would like to propel women of today forward by answering your financial planning questions each week in our special month-long series, “A Women’s Guide to Investing”. We asked the women in our community what they would want to hear from a Financial Advisor as a woman. Each Friday we will share a variety of questions and provide answers and explanations to help you feel more empowered and confident as you navigate through your financial journey. This week we will explore why women should be thinking about saving and investing differently than a man, how to find a Financial Advisor that is a Fiduciary, and provide insight on what your investments should look like as you approach retirement and prepare for living off of your portfolio.
Is there anything I should be thinking about differently as a woman?
Answered by Carli Smith, CFP®, Wealth Management Advisor
Women are often underrepresented in the investing world, but it is changing fast for several reasons. It is important for women to recognize and then take action with their financial planning and investments because of these very important realities. First, the rise of women controlling the wealth on an individual and household basis is perhaps one of the most significant economic shifts in recent decades. It is estimated that $30 TRILLION, yes, I said trillion, will be inherited by women over the next 40 years. The main drivers for this are that women typically outlive men, there are higher divorce rates, and with each passing year more and more women are rising in the ranks of corporations or starting their own businesses. With these staggering statistics, why is it then that women are less secure financially and less prepared for retirement than men and what can we specifically do about it?
First, we tend to be the primary caregivers for our families. Often, we are putting our careers on pause or we reduce our workload either to take care of children or aging parents. When this happens, we miss out on pay and potential retirement benefits such as profit sharing, bonuses, and future promotions.
Second, we tend to make less than men at $0.80 on the dollar. You may think it is because we aren’t advocating for ourselves, but one Harvard study found that this isn’t the case. Women are asking for the pay and for the raises. They are just less likely to get what they ask for which translates into less future investment opportunity.
Third, we are living longer than men. The average cost of retirement each year is about $43,000 per year. Assuming you live five years longer than your spouse or are retiring on your own, you will need an extra $215,000 to cover the annual expense of retirement.
Finally, and this is a BIG one, women are really good at saving, but not as good at putting it somewhere that has really good growth potential. In fact, women typically save more than men, but on the flip side, tend to invest 40% LESS than men. When asked what they would do if handed $1,000, 2.5 times more men than women said they would put money in stocks. What is most interesting about this statistic is that studies have shown that when women do invest, they tend to be better investors than men, i.e. earn higher returns over a long period of time. What this tells us is that more women than not are more risk-averse, demonstrate less investment knowledge, and feel less confident when making investment decisions…this all translates into their portfolio composition and future expected returns.
Becoming aware of the challenges women face provides for the opportunity to put a plan in place to take action so that we can forge ahead and take control of our financial future. Specifically, what are some things you can do to improve the likelihood of your overall financial success?
1) Hire a Financial Advisor that takes a comprehensive financial planning approach to help with the below
2) Take inventory of where you stand financially on a holistic level and revisit annually
3) List out your goals and map out a plan
4) Think LONG TERM
5) Take an active role in your finances the same way you do for your work and family. It is just as important!
Click here to learn more about the women’s retirement gap from one of our previous blog posts.
I have been told I need to find a Financial Advisor that is a Fiduciary. How do I do that?
Answered by Rachel Roth, Wealth Management Associate
An Advisor who is a Fiduciary is one that is acting in the best interest of their clients. They are held to a legal standard to provide the best care. It’s important to remember that not all Financial Advisors are Fiduciaries.
Fiduciaries are “fee-only” which means they are paid based on your assets under management (AUM) or by an hourly rate, never taking commissions or other forms of revenue from selling products. There is another term, “fee-based” that sounds like “fee-only”, but they are slightly different in that “fee-based” means it is a combination of “fee-only” and taking commissions. You can learn more about this question in our blog post, Five Questions to Ask a Financial Advisor Before Your Hire Them.
The best way to determine how an Advisor is being paid is to look at their Form ADV which is a required form filed with the SEC and available to the public at www.investor.gov. This disclosure will tell you how they are paid. However, the simplest way to find out is to ask the Financial Advisor. Ask how they are compensated and make sure they are “fee only” and not just “fee based”.
How do I structure my portfolio as I prepare for retirement?
Answered by Kira Scott, Wealth Management Associate
As you approach retirement, it’s important to review what percentage of your portfolio you have invested in the stock market. The five years before and after retirement are generally the most critical when it comes to protecting the money you’ve saved so far. Any market volatility during this sensitive time period could dramatically affect how long your money lasts, as your investments won’t have as much time to recover as when you were younger.
For this reason, we recommend you reduce your allocation to stocks gradually as you approach retirement. Your exposure to stocks would also be more risk-friendly in a low-cost, well-diversified mutual fund or ETF as compared to individual stocks. A well-diversified mutual fund or ETF typically holds hundreds or thousands of individual stocks in different sectors, sizes, and geographic locations. When any individual stock in these funds goes down, your potential for the risk of loss is not as great because it is only a small portion of your overall holdings.
It’s also key to invest in a fund or ETF with low management fees, or those fees could eat away at any investment returns you make. The Key To A Successful Investment Experience is to focus on what you can control.
While every person and situation is different, try to set aside enough cash to cover a year’s worth of anticipated retirement expenses and invest it in a relatively safe, liquid account such as an interest-bearing bank account, money market fund, or short-term CD.
Within your main portfolio, investing 2-4 years of living expenses in short-term bonds or bond funds creates an additional short-term reserve that will cover withdrawals from your portfolio and help inoculate your portfolio from a market downturn. Short-term bonds or bond funds typically also earn a better return than a money market or CD. Bonds typically don’t have as much upside as stocks, but they are important to a portfolio because they provide protection of principal, consistent income, and financial stability. These cash reserves and fixed income holdings in your portfolio are better sources to tap when you are in need of cash flow, so you are not forced to sell equities at a time that would cause tax consequences that would further reduce your retirement reserves.
With a year’s worth of cash on hand and this short-term reserve in fixed income in your portfolios, you can invest the remainder in investments that are appropriate for your goals and risk tolerance. Consulting a trusted financial advisor can help with figuring out the right asset allocation for you. Your advisor can provide analysis, insight and will often utilize planning simulations which calculate the probability of achieving specific financial and retirement goals across a wide array of possible outcomes in the markets. While there are no guarantees, these types of simulations can help a client make better decisions on what is right for them by understanding the best and worst case scenarios.
“A Women’s Guide to Investing” Week One Wrap Up
We hope you enjoyed the first week’s topic for our “A Women’s Guide to Investing” special blog series. In the following weeks, you can expect more questions on a variety of topics that impact women. If you have a question for one of our Advisors at ML&R Wealth Management, please contact us. We would love to help answer your questions.
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