Week 109 - Women need to plan for retirement differently than men

Situation: Gee, are we stating the obvious? The average man depends on Social Security to anchor his retirement, whereas, women have to rely more on savings because their Social Security checks are smaller. Why? Women leave the workforce from time to time, as caregivers for children and/or parents. And the reality that continues to plague women is that even when working full-time, they will be paid less money than a man with the same skills doing the same job. Why? Because her employer will consciously or subconsciously handicap the risk that she will resign (or take a leave of absence) to become a caregiver, or relocate when her husband takes a better job. According to published studies, her former employer will hire a new employee who has no more than a 50:50 chance of replacing the lost effort and ability of the woman who left, even after a one-year training period.

In practical terms for a retirement portfolio, what does this mean? Lower earnings + fewer earning years = a smaller Social Security check. Now let’s compound this with the additional complexity women face, with greater uncertainty than men due to living a longer life. Is her husband’s life insurance policy going to be adequate? Has he written a suitable will? Will she stay married to him and benefit from the larger Social Security check that married couples receive? Perhaps she is unmarried but living with a man and raising their children. In that circumstance, she faces an almost palpable risk of future destitution.

We’ve noticed some differences in long-term saving styles between men and women. Men tend to invest with the idea that they’ll be able to make a profit--even after transaction costs and losses to inflation and taxes! This is a challenging goal (see Week 28), even for those with a finance-related degree who devote most weekends and evenings to the project. Women have an uncanny knack for knowing that is a foolish idea and instead seek to “maintain what I’ve obtained." Women will work hard to save money then put it where it won’t lose value. When women think about putting money in the stock market, they prefer stock in companies they know something about, or have a comfort level with. Peter Lynch, who managed Fidelity’s Magellan Fund in the 70s and 80s, used to quip that his wife was his best financial advisor. People thought he was joking, so he took to pointing out her good picks and why she had made them. Her recommendations were based on her experience as the family shopper, and her general view of business activity around Boston. Peter Lynch, and Warren Buffett, are the only known big investors who have consistently beaten the S&P 500 Index for decades. Peter did it for 22 consecutive years; Warren has done it for rolling 5-year periods since 1975. Academic studies also identify a gender difference in stock-picking, with women being more risk averse than men and perhaps better at predicting how a company’s retail products will play out in the market.

In addition, women have different needs for money than men and have more trouble finding investment advisers who will help them meet those needs. The financial services industry is still a men’s club, and not many of those guys have learned how to engage in genuine level communication when advising a woman. In addition, men are usually trying to “solve” different life problems than women. Women tend to be focused more on quality of life, meeting the needs of children, and family issues. It is the rare husband who will invest money left over from his wife’s salary in a manner that will be useful to her when she is a retiree, and perhaps even a widow (aside from buying life insurance and jewelry). He is usually interested in adding her savings to his pool of often risky investments, even if he’s investing in “her” IRA. Over time, a woman with a good job will learn to develop her own savings plan, and will increasingly take personal responsibility for that plan, instead of paying an investment advisor. The internet has made all that much easier (thankfully).

For those women who manage to become an aggressive (and probably secretive) saver, there are a number of ways that her retirement savings can be eroded. There are those “one-off” expenditures; there are children starting out in life, there's her own health care or housing needs, etc., that have a way of popping up unexpectedly. Stocks cannot be counted on to help in a crisis, since those crises (e.g. unemployment) usually happen when the stock market is down. We have to remind ourselves that stocks need to be sold no less than 3 yrs in advance of any known need. Those proceeds have to be put in a savings account, or US Treasury Bills and 2-yr Notes (treasurydirect) until needed. The reason for this is that those are the only zero-cost investments that are guaranteed to a) give back your original investment, and b) pay interest that reflects inflation to some degree.

What else is available to help a “female head of household” have some financial security? What about other investments? Income earned from the principle of an investment-grade bond fund is secure but not the principal itself, because inflation will erode her ability to recover the value of her initial investment on short notice (just as a recession will increase its value). Jewelry can be hoarded for a rainy day but she can only sell it back for approximately half of its original cost. Real estate is a reliable savings vehicle only if it pays rent (or imputed rent if she lives in the property). But a house or apartment can be problematic to sell on short notice. Remember, the time when you need money the most is, unfortunately, the same time when the real estate market is likely to be down. How about our friend gold? Gold fluctuates even more widely in value than real estate and pays no rent, nor can you live there.

Bottom Line: What women really need is a Rainy Day Fund (see Week 33) composed of DRIPs in the best Lifeboat Stocks (Table), low-cost mutual funds that hedge against stock market risk (VWINX, VBINX, BRK-B), and a large helping of Treasury Bills/Savings Bonds (treasurydirect), plus an FDIC-insured savings account (and/or CDs) at her local bank. We also strongly urge women who have limited revenue available for investing to read our blog called “Retirement on a Shoestring” (see Week 14 and Week 15).

Risk Rating: 3.

Full Disclosure: I am a male in the financial services industry. I make monthly additions to DRIPs in 5 of the 10 Lifeboat Stocks (see Week 106) that are listed in this week’s Table: NEE, ABT, WMT, JNJ and KO.

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