From the pages of In Business magazine.
Should a woman’s financial playbook become more aggressive? As wealth changes hands over time, one influential financial expert and best-selling author thinks it’s imperative.
Jean Chatzky, the financial editor of NBC’s Today show, believes women tend to be more risk-averse investors, opting for safety, security, and stability more so than men do. In her most recent book, she makes the point that women are about to inherit roughly 70 percent of the $41 trillion in intergenerational wealth that’s expected to be transferred over the next 40 years, and they will also control the vast majority of wealth in the United States and globally due to this intergenerational transfer.
Yet because women have earned less, and still do, than men, and they live longer — the latest data from the Centers for Disease Control and Prevention shows that American women outlive their male counterparts by five years (81.1 years to 76.2) — and they are more likely to be the spouse or partner that takes breaks from the labor force to care for children and aging parents, Chatzky believes they need less risk-averse investment strategies.
We decided to get a local take on that assertion with the following Madison-area financial advisors: Jeff Collins, vice president and trust officer in the wealth management division of State Bank of Cross Plains; Emma Mueller, a financial consultant for Park Capital Management; and Shayna Borakove, an estate planning attorney with the Borakove Osman law firm. We also spoke to Tami Kellar, associate vice president-private banking for Park Bank, to get the view of an individual investor.
Risk-averse women: Stereotype or spot-on?
Do women really invest more for safety, security, and stability? If they do, is that a bad thing? Collins doesn’t accept this, noting that risk-tolerance is a very personal thing. “I haven’t really found that to be true,” he states. “Risk tolerance is a real personal feeling toward the risk of loss of money. I think it’s probably pretty equal in terms of men and women willing to take a little bit more risk to potentially get more growth and more gain.”
Collins, however, does not quibble with the need for women to start early to make up for factors such living longer and earning less, allowing the clock and the so-called magic of compounding to work for them. According to Collins, life expectancy probably hits home for most people around the age of 55. By that point, most people start to take a serious look at their financial picture, and the factors that go into that calculation are their predictable, stable sources of income (Social Security, pension, and so forth), their preferred retirement lifestyle, and the amount of money they need to fill any gaps. “Things become more of a reality at that point,” he states. “People get a much clearer picture of what they need to do over the next 10 years, maybe the last 10 or 15 years of their working lives, to put it all together.”
As Collins notes, when you’re young, it’s easy to focus on lifestyle needs in retirement and neglect medical and care expenses. We simply don’t think about the reality of higher care needs when we’re old, when most of our health-care spending will occur. “With respect to life expectancy, starting early is definitely a consideration — not only for income purposes, but for care purposes with nursing-home expenses and health-care expenses,” he notes. “Typically, women, if they need care, will spend more time in a nursing facility or receiving home health care or skilled care than a man would.”
Mueller cites a “gender-investment gap” even as she sees a lot more interest in investing among women as they either re-enter the workforce or gradually take on roles and earn higher pay than men. Achieving equal pay for equal work has been like turning around a large ship in a confined space, but as more progress is made, that gap should close. “I still think they are a little bit less aggressive investors than men, due to a lack of financial literacy and a lack of confidence because it’s fairly new to a lot of them, so again we tend to be a little less aggressive, keep more in cash or in the banks, and not have a relationship with a financial advisor,” Mueller says. “The whole concept of financial [understanding] for women is fairly new and it’s not as talked about, and often times they have relied on a working spouse to manage finances and invest in the past.”
When it comes to identifying stereotypes, Borakove turned the tables. The flip side of the risk-averse coin, she notes, is too much risk. “With investments, if you are making emotional decisions, then you are being riskier and that’s not what women are doing,” she states. “We’re thinking about the long term. When I work with a client as part of estate planning, I talk to women and remind them that estate planning is not just about when somebody passes away. You have an estate during your life.”
Women get this, and they know that money and investment are not all about a number, Borakove says. They don’t have “gain theory” when talking to an estate planner. They have a goal theory and they have a relationship theory driven by the following question: How is this money going to affect my family? “It’s not that we’re risk-averse,” Borakove states. “We want to achieve our objectives because we’re family-forward, and so this stereotype can have good elements. Women are stereotypically risk-averse and have a conservative investment ideology because we’re thinking about the long-term.”
How much is enough?
How do people know they are saving and investing enough? Is there a certain percentage of income that people should be saving annually and by various mile markers in their lives? Saving and investing aren’t easy things to do, especially for younger people saddled with college debt, but most advisors suggest putting aside 15 percent of their annual income, including 401(k) contributions and the employer match. “For most people, that would be a pretty solid number,” Collins states.
Taking the longer view, Mueller says that in your 30s, it’s good to have saved one times your annual salary, two to three times your salary by the time you’re in your 40s, five to six times in your 50s, and eight to nine times in your 60s. To do that, she notes that it helps to work for an employer with a retirement plan, especially if you’re getting back in the workforce.
“That’s the easiest way to start saving for retirement,” Mueller states. “It starts a discussion around investment because a lot of times when you open up a 401(k), it’s tied to a custodian where there are investment options available. So, often times that tends to be the very first place some women that are starting in the workforce see investing, aside from the bank accounts and investments they may have outside. So, take into account the company 401(k) and a company match.”
Mueller echoed Collins, advising people to save about 15 percent of their annual income. “So, if you put 10 percent in, and the company matches at 5 percent, you’re already there,” she notes. “If you’re at 6 percent, increase at least 1 percent per year at rate time. If you’ve never done it, start small and then increase it from there. So, the 401(k) is the place to get back in, as far as investing is concerned.”
Mueller also recommended shedding high-interest debt — such as credit-card debt — establishing an emergency fund of three to six months’ worth of expenses, forming and sticking to a budget plan and, just as importantly, setting a goal that factors in when you want to retire and how much you want to spend in retirement “Having that discussion, not necessarily that I need x-millions of dollars or whatever that may be, but what do you want to spend in retirement? That’s where financial advisors can come in and talk about different ways to get there.”
Mueller recommends a well-diversified portfolio — balanced between stocks, bonds, and cash -— and periodic review. If you’ve started early enough and you’re approaching retirement, review your investment allocation to determine if it should be adjusted to become a bit more conservative and preserve the wealth you’ve built.
“And then there are discussions as far as inheriting assets from parents,” she adds. “If you already have a small investment that you started on your own, you start to understand how that’s worked, and then you start to implement and integrate other assets that you may be inheriting into that.”
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If you’ve started investing later in life, you’ll probably have to remain more aggressive longer, but you can start saving at any time. While some have a higher risk-tolerance at any age, late starters can least afford to play it safe. “Certainly as you’re starting savings, and you’re in your 20s, absolutely be more aggressive in your 20s and early 30s,” Muller states. “However, for those women who maybe haven’t started saving at all and are starting in their late 40s and early 50s, it’s never too late to start saving. Of course, you hear that, but at that time, because you lose out on compounding in your 20s and 30s, you may actually have to take on a little bit more risk in your late 40s and early 50s to handle some of the missed opportunities that you may have otherwise taken in your 20s and 30s.”
The aforementioned 401k(s) are said to be a solid investment vehicle, but a variety that also includes Individual Retirement Accounts and other vehicles is the ideal. With a 401(k), one of the advantages is that you have the ability to set aside a significant amount of money pre-tax, whereas a traditional IRA is going to be limited each year to a much smaller amount of money.
If you’re trying to bring down your tax bracket, the pretax 401(k) offers pretty good leverage in terms of bringing down your pretax income. However, with the exception of borrowing off that account for various stated purposes (and automatically paying it back through a payroll deduction), it’s not a very liquid, accessible pool of money. For most people, it’s prudent to have another source of investment.
A Roth IRA, for example, would be more accessible in an emergency or if a better investment opportunity presented itself. For example, if a married couple happens to have a dream of buying a cottage on a lake, Collins notes that if money is in a pretax account like a traditional IRA or a 401(k), that money is not available without penalties on a traditional IRA and might not available at all with a 401(k). With a Roth IRA, however, anything that is contributed by the participant over a period of years can be withdrawn at any time with no tax or penalty.
“So, maybe they have contributed $6,000 a year for 10 years,” Collins says hypothetically. “That’s $60,000 that’s been contributed to the Roth IRA. Say the Roth IRA is worth $90,000 after that period of time. They can draw out the $60,000 with no tax and no penalty, make a down payment on a lake cottage, and allow the $30,000 that’s remaining in the Roth IRA to continue to work for them.”
Trade-war inhibitor
If someone were to lay the foundation for a more aggressive investment strategy, how does one become less risk-averse at the moment, given that the existence of trade war that is weakening the national and global economies and spooking the financial markets? Since President Trump first announced increased tariffs on imported goods in early 2018, the stock market has spiked up and down like a roller coaster. The markets probably would be going up steadily, with very few hiccups, if two of the world’s largest economies weren’t involved in this standoff, so what’s an investor to do?
Once again, that internal voice about risk-tolerance should be your guide. “Everybody is a little different,” Collins notes. “Ideally, we would have very accurately identified a person’s risk tolerance that would be suitable in almost all situations, but we know that’s not the reality in every case. At times like this, we do get calls from people who are nervous about the market. For most people, it’s a conversation that goes back to the original goal that they had, and for most people, those are longer-term goals.”
If you have more time on your side, it’s easier to stay the course. If not, a more aggressive posture should wait for the dust to settle. “If they have a five to 10-year time horizon prior to needing that money for something, for most people ‘stay the course’ is the proper course of action,” Collins states. “At a time like this, the market will present opportunities to make additional investments, potentially, and purchase shares of investments at lower prices, which can be very advantageous over an intermediate period of time — five to 10 years.”
Collins also has a suggestion pertaining to debt, including some relatively new thinking on whether it’s beneficial to pay off a mortgage early. “There is good debt and there is bad debt,” he says, citing credit-card debt as an example of the latter. “So, for a lot of people, the old adage of ‘pay the mortgage off as soon as you can’ comes from their parents and their grandparents. Typically, real estate has been a good, appreciating asset and today, with historically low long-term mortgage rates, in a lot of cases it does make sense not to accelerate your mortgage payoff and use those dollars more productively in a Roth IRA.”
Periods of market volatility, Mueller adds, can be a great time to get into the market, especially if you’re not near retirement. “If you’re a young investor, there is plenty of opportunity for good purchases today, even with the market being as volatile as it is,” she explains. “When the market is down, that’s the prime opportunity to get into the market. The benefit to a 401(k) is you’re typically putting in money every two weeks, sometimes every week, through payroll. You’ll be buying when the market is up, and you’ll be buying when the market is down. We call that dollar-cost averaging. Over time, over the long-term, those bumps will even out, and it will be to your benefit to actually go in when the market is volatile.”
Advise and consent
The easy choice, or what seems to be the easy choice when handling your finances, is often not the most productive. So, just like anything else, being financially successful takes some work, but not an onerous amount of work. As long as they have a good, diverse, well-allocated portfolio, most investors probably don’t need to pay a lot of attention to the investments in the account, but they do need to periodically talk things over with a trusted advisor. Investors should do so annually to make sure they are comfortable with the ups and downs that occurred during that time period, and every five years to determine whether more substantial adjustments are warranted.
Financial advisors have, by state and federal law, a fiduciary responsibility to act in the best interests of their clients, but finding a trustworthy partner requires a little due diligence on the part of investors. It’s not just about taking on an advisor that your parents went with or your friend used, so interview advisors and ask them questions because it’s their job to explain things, including more complex things. Investing, Mueller notes, requires more understanding, more education, and more discussion around how to invest and invest more appropriately “with a little bit more risk, certainly, for women.”
Whereas Mueller mentioned a gender-investment gap between men and women, Borakove cited a financial-knowledge gap that stems from leaving financial considerations up to a male significant other. Managing finances should always be done in collaboration in a marriage so that surviving spouses can act in their best interests.
“When our husbands or our partners pass away, we are going to be the ones administering the estate — all those assets — upon the first death,” Borakove explains. “We do not want to start building a relationship [with a financial advisor] at the point of someone’s death. Our relationships with financial planners and CPAs should be established already because in a moment of transition, we do not want to start transitioning again. We want stability.”
Relating to investment advice
Tami Kellar doesn’t really know if women are more risk-averse than men when it comes to investing — it’s not really a conversation she has with many people — but she does know that getting started early and finding a trusted advisor has enabled her to make most of the right moves when building a nest egg.
Kellar, associate vice president-private banking for Park Bank, is in mid-career and she’s been building that nest egg for quite a while. She’s always been part of the bank’s 401(k) program, maxing out on the company match and taking full advantage of compounding over time. “I started in banking right out of college,” Kellar notes. “I’m in my 23rd year, and I immediately started with the company’s matching program and 401(k).”
In addition to maxing out on the company match, she takes advantage of another provision of Park Bank’s 401(k) plan, one that encourages even more saving. Some 401(k)s have an automatic step-up plan, and each year of her employment, Kellar always increases her contribution by 1 percent. And while that 401(k) is her primary investment vehicle, she also tries to build her savings account for emergency situations and have funds set aside for anything that might happen in her personal life, as well.
Kellar is not one to just “set it and forget it,” as she meets twice a year with her financial advisor to evaluate how things are going. Kellar, in fact, is in the enviable position of placing full trust in her advisor, Clint Bauch, because she’s been building more than wealth, she’s been building a trusted financial relationship with him since their time as colleagues at the old M&I Bank, since acquired by and folded into BMO Harris Bank. Bauch understands her characteristics as an investor and, accordingly, he makes periodic adjustments in the account.
Having an astute advisor, and building a trusting relationship with him or her, is top of mind when Kellar offers investment advice to women. This individual has to listen to your concerns and take your life changes into consideration. Your advisor also should help you understand your investments because, in Kellar’s own words, “I don’t just hand over my money. I’m always comfortable reaching out to him when I have questions, and he takes the time to explain the choices he is making for me.”
That’s especially important at a time of stock market volatility, such as when the United States and China are locked in what appears to be an intractable trade war. At a time like this, a savvy, experienced financial advisor can help a client keep things in perspective and take the long view.
“I think it’s about the personality of the client,” Kellar explains. “I know that I need to sit back and just wait things out. I also know that I have time to do that if the market changes, and that’s something my financial advisor and I have incorporated in our conversations. Knowing where I’m at, and my time frame to retirement, gives me the time to catch up when the market goes down.”
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