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Nurturing a Long-term Financial Mindset

Jennifer Liebel
Manager | CAPTRUST Marketing

When it comes to economic power, women have certainly come a long way. Women now hold the majority in earning bachelor’s, master’s, and doctorate degrees, and almost a quarter of women married or cohabiting with a partner say they earn more than their partner.1 Key findings from a Women of Wealth study commissioned by the Family Wealth Advisors Council also confirm an increase in the number of women controlling the United States’ investable assets. In fact, it is estimated that by 2030, at least two-thirds of the nation’s wealth will be in women’s hands. Yet when it comes to longer-term financial planning, like planning for retirement, women tend to be less confident, as we see in Figure One.2

A wise boss once told me that confidence is derived from one of two things: knowledge or experience, and sometimes a combination of both. Generally speaking, women have confidence as it relates to short-term household finances — 
their ability to meet goals like buying a home, reducing their debt, supporting themselves, and not burdening their families financially.3 In other words, women are great at making shorter-term financial decisions but are less engaged in planning for their financial futures. This gap in knowledge and experience could be affecting the confidence needed to make smart financial decisions over the long term. 

Women make choices every day to maximize utility and, by and large, embrace the consequences. Throughout our lives, we experience life events—marriage, children, promotions, and maybe divorce and widowhood—that force us to focus on ways to extend ourselves as part of a quest to give as much as possible to our jobs, spouses, children, parents, and friends. These life events often impact us financially. With these considerations in mind, it’s no wonder that great value is placed on time and we prioritize non-immediate things, such as being well-versed and experienced in planning for retirement lower on our to-do lists. I dare say, maybe that should change.

Regardless of gender, conventional wisdom suggests that most individuals will need at least 70 percent of their pre-retirement income when they retire. When it comes to retirement, one of the most impactful ways to make a difference over the long term is to take advantage of time. It’s simple: the earlier you save, the more you build over time. Considering longevity alone, it’s easy to see how important it is that women be engaged early on in planning for retirement. According to the U.S. Department of Labor, a female retiring at age 65 can expect to live another 20 years, three years longer than a male retiring at the same age. In fact, predictions indicate that nearly one-third of women who reach age 65 can expect to reach age 90.4

According to the U.S. Census Bureau, nearly 700,000 women lose their husbands each year, and those who are widowed outlive their husbands by an average of 14 years.5 Some experts estimate that women will accrue $25 trillion by 2030 through generational and spousal wealth transfers.6 However, a spouse’s death can also be financially devastating because it can mean losing Social Security benefits, pension, or health coverage.7 Given these statistics, it is imperative that women gain confidence and feel more empowered to make wise financial decisions that affect their future.

So why aren’t women more involved in long-term financial planning when it comes to retirement? It could have more to do with how we view risk and where we focus in a financial sense. Financial planning worries for women tend to be focused within, first on their households and then on retirement.8 Women also tend to be more risk averse, operating from a place of protecting their household and portfolios — whereas, men tend to be more comfortable taking risk if they see a financial reward in doing so.9 This risk-averse behavior is also evident in their financial portfolios, as women tend to rely more heavily on earned income.10 It could be argued that their risk tolerance is primitively rooted, and could be explained by the Caregiver Theory, which asserts that a woman’s role as primary caregiver from an evolutionary standpoint actually causes her to look at risk more cautiously than
a man would.11

It’s been argued that women make better investors. A study conducted by the University of California proved that, in areas such as finance, men are more confident. Yet, the data collected from over 35,000 households over the course of seven years concluded that single female investors outperformed single males by 2.3 percent, female investment groups outperformed male counterparts by 4.6 percent, and women overall outperformed by 1.4 percent.12

You may be wondering why women investors outperform men. One explanation may have to do with gender roles within society. Men have often been rewarded for being proactive and making firm decisions, even if it means taking risks. Comparatively, women are often rewarded for being more attentive and open to other views, being introspective and open to self-criticism. These gender roles may affect behavior and personality, and provide context about perceptions of financial risk.13

According to John Coates, author of Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, financial risk “acts as a powerful token distilling many of the threats and opportunities we have faced over eons of evolutionary time.”14 Cautiousness toward risk may actually explain why women are wired to collaborate when making decisions and may be what makes women better investors. This kind of mindset could be well suited for retirement planning. While these are all positive things, it’s important that women know how to manage accumulated wealth, avoid unnecessary risk, and feel confident about making long-term financial decisions, including those related to retirement and generational wealth transfer.

According to the Allianz 2013 Women, Money & Power study, the topic women want to learn about most is how to achieve their preferred lifestyle in retirement; in fact, 85 percent of all women in the study felt this way. As indicated in Figure Two, 

a majority of women express strong interest in learning more about finances and retirement planning. Part of achieving a preferred lifestyle in retirement involves preparation and tailoring a financial planning agenda and investment strategy to how and when you would like to retire.

Regardless of gender, when actively saving for retirement, it’s important to engage your financial advisor to ensure your individual needs are top of mind and to collaborate actively — including monitoring the risk level you are comfortable with. If you are nearing retirement age or are already in retirement, you may want to focus on protecting yourself from too much investment risk, consolidate accounts and pensions, make beneficiary designations, and, most importantly, have a complete end-of-life wealth-transfer plan for your children or beneficiaries in place.

As the longevity statistics and facts mentioned earlier point out, most women will be involved in long-term financial planning or be in the position of managing their wealth at some point in their lives — if they are not already. Therefore, women may want to think differently about their roles relative to long-term financial planning — and get more directly and actively involved. Involvement should be rooted in empowerment and gaining financial decision-making confidence, and, more importantly, in the ability to prepare for retirement as part of an effort to nurture the next generation. It’s in our nature, after all. 

Sources:

1 
U.S. Department of Education, National Center for Education Statistics. (May 24, 2012). The Condition of Education 2012. Retrieved December 4, 2013, from Institute of Education Sciences: http://nces.ed.gov/fastfacts/display.asp?id=72

2 
Employee Benefit Research Institute. (2013). 2013 Retirement Confidence Survey. Employee Benefit Research Institute

3 
Prudential Research Study. (2013). Financial Experience and Behaviors Among Women. Prudential

4 
U.S. Department of Labor. n.d. Women and Retirement Savings. Retrieved December 30, 2013, from United States Department of Labor—Employee Benefits Security Administration: http://www.dol.gov/ebsa/publications/women.html

5 
U.S. Census Bureau, 2009

6 
Mary Quist-Newins, “Untapped Market: Women May Be Gaining Economic Power, but They Still Feel Financial Planners Are Not Recognizing Their Potential”
(March 1, 2010)

7 
Ibid

8 
(2009). In M. J. Silverstein, K. Sayre, and J. Butman, Women Want More: How to Capture Your Share of the World’s Largest, Fastest-Growing Market. Boston Consulting Group

9 
Bank of America. (2013). U.S. Trust 2013 Insights on Wealth and Worth™. U.S. Trust Bank of America Private Wealth Management

10 
Ibid

11 
Barber, PhD, N. (2010, August 10). “Why Women Live Longer than Men: It’s All About Risk Management.” Retrieved November 15, 2013, from Psychology Today: http://www.psychologytoday.com/blog/the-human-beast/201008/why-women-live-longer-men

12 
Barber, PhD, Brad, and Terrance Odean, PhD. “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The Quarterly Journal of Economics, 2001

13 
Shrira, I. (2011, September 20). “Women More Likely than Men to See Nuance When Making Decisions.” Retrieved January 3, 2014, from Scientific American: http://www.scientificamerican.com/article.cfm?id=sex-roles-and-seeing-the-world-in-black-and-white

14 
Coates, J. (2012). Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust. New York, NY: The Penguin Press

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