Overcome The Retirement "Gender Gap"

Many people won't save enough money for a comfortable retirement, but women have an even higher risk than men of coming up short when they stop working.

There are three key factors that have the greatest influence on retirement savings: income levels, risk tolerance and life expectancy. In each of these categories, women may hold the losing hand.

Income Falls Short - According to 2010 U.S. Census Bureau data, women earned $36,931 on average, while men earned $47,715. Women earn less than men because of time spent out of the workforce. Women frequently take time away to have children, raise families and increasingly, to care for aging parents.

At the same time, however, women are often paid less for the work they do, regardless of how long they're employed. According to the Women's Institute for a Secure Retirement (WISER), on average women earn around $0.77 for every $1 earned by men. That's roughly a $300,000 loss over a career's lifetime!

Because retirement benefits are based on accumulated earnings during a working career, this "gender wage gap" quickly turns into a retirement wage gap. As such, WISER points out, women with pensions receive about 58% of the average male retirment income, or $13,603 annually compared to $23,500 each year for a man.

The impact of this gap is multiplied by the fact that women typically live longer than men. Add on the possibility of divorce or widowhood, in which women may lose out on a portion or all of their spouse's pension benefits, and women clearly head into retirement with far less wealth than men.

Risk Tolerance Is Low - When it comes to choosing how to invest retirement savings, every individual must decide which risk-return relationship is comfortable, but also ensures their financial goals are reached. A common mistake is to invest retirement assets too conservatively, thereby sacrificing long-term growth.

Investment history and theory have proved that higher returns are attained by taking on more risk. For women, being overly cautious with an investment strategy for retirement will only magnify the problems they already face as a result of lower lifetime incomes and longer life spans.

It's All in Your Mind -  Psychological factors play a very important role in how women deal with money and investments. A review conducted by James Byrnes, David Miller and William Schafer (1999) of 150 psychological studies of risk-taking by men and women found that women generally perceive more risk, and are more risk-averse in situations ranging from health to the environment, public policy or finance.

The reasons for this risk-gender discrepancy are complex. Some studies suppose that women's greater responsibility in childbearing and reproduction leads to risk-aversion (J. LaBorde Witt, Journal of Women and Aging, 1994). Others point to the way women are raised. Regardless, most women can recount feelings of fear and intimidation when it comes to dealing with money and investments.

An analysis by John Watson and Mark McNaughton in the Financial Analysts Journal in July 2007 quantified the impact that risk-aversion has on women's projected retirement benefits. Controlling for age, income and education, the study concluded that women choose more conservative investment strategies, and that this is the primary reason why women can expect to have less retirement savings than men. The effect is compounded because women make less, retire earlier and live longer than men.

What's Next? - Women require more financial education to help them determine the appropriate risk, return and retirement strategies to meet their goals. A growing number of financial advisors, banks and organizations have recognized this knowledge-gender gap and are creating education programs aimed specifically at women.

The Bottom Line - It's time for all women to take charge of their retirement savings. Seek out a financial advisor, investor education materials and other resources that target the unique circumstances women face. Ask questions. Don't wait.

Source:  Investopedia

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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