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Yo, ladies! It's time to adopt a
"me-first" attitude when it comes to saving for
retirement.
There are a number of compelling
reasons why women should be especially diligent about saving in a
401k or other tax-deferred retirement plans, even if they have
other demands on their money.
On average, women live longer, earn
less (and therefore may get smaller Social Security checks), and
are single parents more often than men. They change jobs more
often and spend more years out of the work force than men do, and
are more likely to work in "pink collar" industries that
do not offer pension plans.
And yet, women often don't focus
their attention on saving for retirement. Other priorities get in
the way, or they assume someone else will take care of it.
"Women are great at putting
themselves last," said Debra Nichols, director of women's
financial advisory services at First Union. "They have a
different approach (to finances) and need to be approached
differently" by those who help them plan.
Live Long and
Prosper
On average, women live longer than
men, so women need to plan for a longer retirement.
"If you live longer, you're
going to need more money," said Martha Priddy Patterson,
author of The New Working Woman's Guide to Retirement Planning:
Saving and Investing Now for a Secure Future. Some of this
money will come from Social Security, but certainly not all of it.
Women need to find other savings vehicles, and tax-deferred plans
like 401ks are an excellent place to start.
Women should be sure to take their
longer life expectancy into account when estimating how much money
they will need in retirement, said Patterson, director of employee
benefits policy analysis at Deloitte & Touche. Some retirement
calculators may use an average life expectancy for men and women,
which is lower than that for women. If you plan to live until
you're 82 and end up living until you're 85, you'll run out of
money.
According to a recent survey by the
Employee Benefit Research Institute, men are doing slightly better
than women at planning for retirement. The 1999 Women's Retirement
Confidence Survey released last November found that 70% of women
and 71% of men were saving for retirement. But, fewer women than
men (44% compared to 54%) tried to estimate how much income they
would need in retirement.
When asked if they felt confident
they were doing a good job of preparing financially for
retirement, 21% of women said they were "very confident"
compared with 29% of men. But when "retirement
readiness" was measured, only 7% of women and 8% of men were
found to be doing a "very good" job. A "good"
rating went to 28% of women and 34% of men, while 34% of women and
29% of men scored "adequate."
Revolving Doors
Eat Up Benefits
Changing jobs often can cost you,
big time.
On average, women change jobs every
four years and seven months, compared with the men's average of
over five years, Patterson said. This is significant in jobs that
offer a traditional "defined benefit" pension plan (one
that gives you a specific payout upon retirement), she noted,
because in many cases you'll get nothing from that type of plan if
you leave before you've been at the company for five or 10 years.
"In the worst case,
theoretically, a woman could work her whole life and not ever vest
her benefits," she added.
However, if you contribute to a
401k or similar plan, the money you contribute and the interest
it earns always belongs to you, no matter how often you change
jobs. You can roll your 401k into a new 401k, or into an IRA,
to keep its tax-deferred status. (But remember, if your employer
offers a matching contribution, it will probably vest over a
period of years, so you should be sure to check the rules before
you quit.)
On average, women also take more time out of the work force during
their careers than men do - 11 years for women compared with 16
months for men, said Patterson. Again, if you contribute early to
a 401k, the money can keep working for you even while you're not
earning a salary.
Actively Manage
Your Money
Studies have shown that women have
different attitudes toward spending and saving than men do. That's
part of the reason Tiffany Bass Bukow said she recently founded
MsMoney.com, one of a number of financial Web sites springing up
just for women.
"I ask just about everyone I
meet, 'do you manage your money?' And I can't tell you how many
sophisticated women tell me either 'I don't have time' or 'I
wouldn't know what to do, anyway,'" said Bukow.
While men often focus on saving for
retirement as a top investing goal, women tend to rank it lower,
behind other goals such as putting kids through college or buying
a home, said Nichols. Women need to realize they should start
saving for retirement at the same time they work on these other
goals, because otherwise they probably won't be able to save
enough.
"For women now in their 20s
and 30s, retirement planning can be easy and painless, even if
they start saving small amounts," said Patterson. "In
later years, it only gets harder."
Women are often sidetracked by
credit card debt, too, feeling they have to pay it off before
they
start saving for something else.
Michele Murphy, 31, knows what this
is like. She wants to pay off her credit card debt (which she
admits amounts to "a chunk of change") but feels she
should also be investing in the stock market.
"It's a tug-of-war,
internally," she said. "Must get out of debt. Must
accumulate savings."
Murphy is doing things right by not
forsaking her retirement plan. She worked out a schedule to pay
off her debt over 12-18 months while still contributing to her
403(b). Once her debt is gone, she'll take that monthly payment
and invest it in the stock market.
Another good reason to put money in
a 401k every month is that it is protected by law from
creditors, even if the owner declares bankruptcy. (A study by a
Harvard law professor, Elizabeth Warren, released last June
indicated that women file for bankruptcy more often than men or
married couples. Her study was based on bankruptcy court filings
in eight districts, and showed that 39% were made by women, 28% by
men, and 33% by married couples over a one-year period ending
March 31, 1999.)
Women also sometimes face a
tug-of-war between paying for a child's college and saving for
retirement. Again, the woman should put herself first, said
Nichols.
"Too often the single mom puts
everything into the child's education and thinks she'll fund her
retirement later," said Nichols. But when "later"
comes, it's usually too late for the mother to build up a
significant retirement account.
What this means, in effect, is that
the mother has unwittingly concluded an "unspoken deal with
her child - I'll put you through college and then expect you to
fund my retirement," said Nichols.
Moms would be better off to tell
their children "Sorry, I can't afford to put you through
college, so we'll have to look at student loans, financial aid, or
a part-time job for you. But the good news is you won't have to
support me through retirement."
"Why Can't a
Woman Be More Like a Man?"
Remember Professor Henry Higgins
belting out that song in the musical My Fair Lady? As irritating
as the question is, it's worth thinking about in terms of
retirement investing.
"Women tend to invest more
conservatively than men," said Nichols, of First Union.
However, "with us living longer, we should be on the other
side."
Women tend to want to preserve
their savings, and consequently think lower-risk investments are
safer. But this strategy leaves them vulnerable to the risk that
inflation will eat away at the value of their savings.
"We need to educate women …
(preserving) what they've got may not be enough," said
Nichols.
This does not mean that women
should jump into high-risk trading, however. That's an area where
men could learn a thing or two from women. A study released last
year by two UC Davis professors found that men's overconfidence in
financial matters led them to trade stocks more often than women,
and the resulting transaction costs actually left them with a
lower overall return.
The moral is that there is no
substitute for a well-researched "buy-and-hold" strategy
when it comes to saving for retirement. 401k plans are an
excellent place to start, because there are generally limited
funds to choose from, meaning less daunting research.
"The thing to do is to have a
good learning curve so you become comfortable with a higher level
of investment risk," said Patterson. (Always make sure your
level of investment risk is appropriate to your situation.)
Here's an example: Say you put
$2,500 a year into a 401k, with a 50% employer match. If you got
a 5% return, after 30 years your nest egg would amount to
$265,353. If you were invested more aggressively, with a 10%
return, you'd have $682,288.
Wake Up and Smell
the Green Stuff
Another obstacle women sometimes
face is that the subject of money and investing simply does not
interest them. But, this has to change.
It's time for those women to wake
up and smell the green stuff. According to MsMoney.com, 90% of all
women will control their own finances at some point in their life
(whether they want to or not).
"Most of my female clients
still expect their husbands to take care of all financial
things," said Larry Beltramo, a certified financial planner
in Irvine, California. Sometimes they are not interested, and
sometimes they fear appearing foolish in front of their husbands,
he said. But the end result is the same - they don't understand
their financial situation. Then, if their husbands die or if they
get divorced, they are faced with learning a lot about a
complicated subject in a short period of time.
Beltramo said he has had female
clients who were suddenly widowed and knew nothing about their
finances. This ignorance led to inaction. "Where I could have
helped them avoid or reduce some taxes, they put it off and it
became too late."
What's a Woman to
Do?
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