Mistakes, not financial markets, prevent investors from reaching their financial goals. For this reason, a financial advisor’s greatest purpose is to help people identify potential pitfalls before they happen. Last month’s blog focused on the top 5 retirement mistakes men don’t know they’re making. This month, we’ll focus the unique mistakes women make that can be particularly harmful because they go unnoticed until it’s too late. The top 5 retirement mistakes that women don’t know they’re making are:
- They overspend on guarantees.
- They don’t take the risk needed to sufficiently grow their assets.
- They don’t demand accountability.
- They put the needs of others ahead of their own.
- They’re not as confident as they should be.
They Overspend on Guarantees
In last month’s blog, I noted that women tend to focus more on the predictability of a given investment strategy while men tend to be much more focused on their annual returns. While predictability and growth can both be helpful, women’s search for predictability in an unpredictable world can lead to overspending on guarantees. So what do I mean by a guarantee? The following is a non-exhaustive list of some of the guaranteed financial products out there: Whole life insurance, certain types of annuities, home warranties, accidental death insurance, and extended warranties on new or used cars. The idea is fairly simple, a financial company promises to pay a guaranteed amount if a certain condition occurs: An accident, a death, a mechanical failure, etc. As a financial advisor, I’ve seen the benefits that insurance and other “guarantees” can have. But, at times, these can blow the monthly budget. So how should women and their partners evaluate how much they can allocate to guarantees and which guarantees are worth the money? Here are two helpful principles:
First, determine which situations, if they happened, would be catastrophic. I’m a proud father of five girls and my wife works in our home full time -and then some. If I were unable to earn an income due to a disability or my passing, how would my wife be able to continue to care for our girls and pay the bills?! My wife and I have agreed that losing my income would be catastrophic, so we’ve prioritized disability insurance and life insurance to “guarantee” an income if I were unable to work. Conversely, if the transmission went out on my car, it would be frustrating, but it wouldn’t be catastrophic, so we’ve elected to forego paying say, $50 a month for an extended warranty. Not all setbacks are catastrophes. Anyone who’s constantly feeling worried about the next catastrophe may have other financial, emotional, or relational concerns that need to be addressed and, ultimately, feeling financially secure is much more nuanced than just buying guarantees.
Second, we can only make informed financial decisions in the context of our personal goals. If, for example, a couple has worked with a financial advisor to determine they need to save $1,000 per month to fully fund their goal of retiring at 65 years old, they may not have an additional $500 per month to allocate to guarantees like a home warranty or an annuity. It all boils down to this important truth: To become financially independent we have to grow our income and guard it with our lives! Life is going to throw endless expenses our way: ballet lessons, life insurance, private school, doctor visits, home warranties, and, and, and… These endless expenses have to be prioritized with the end goal in mind.
They Don’t Take the Risk Needed to Sufficiently Grow Their Assets
Typically, as we take on greater risk with our investments, we tend to receive a greater return. What I’ve noticed after years of advising people on finance is that many women prefer a dependable annual return, even if it’s significantly less than an investment with varied returns. This can be a disastrous mistake in the long-term because, after inflation and taxes, “dependable” strategies like CDs or money markets, tie up your money without increasing your purchasing power over time.
To put this in perspective, if an investor wanted to retire with $1,000,000 of purchasing power, and only invested in “risk free” strategies that kept pace with inflation, they would have to save roughly $1,000,000 over their working life to achieve that goal. Assuming a 40-year working life, a person would have to save $25,000 every year, for 40 years! How many people can afford that?! Conversely, if a person invests in a variable, growth-oriented strategy with an annual return of 9%, they would only have to save $3,000 a year, over a 40 year working life to have saved $1,000,000 of purchasing power. Taking on a thoughtful amount of risk can be particularly life changing for women who, unfortunately, tend to earn less than men during their working lives.
They Don’t Demand Accountability
Personal finance is one of those things that can go really, really wrong… especially when you’re not kept in the loop. In years of practicing financial advising, I’ve met too many women who have had the financial rug pulled out from under them when they lose their partner. Earlier this year, I met a woman whose husband had recently passed very unexpectedly. When she learned what I did for a living, she confided that her husband had never put her name on the deed to their home. He also took out a home equity loan on their home without telling her. As a result, she was grieving the loss of her husband and, at the same time, in the process of proving she had a legal right to her home while trying to stay current on a home equity loan that she didn’t know existed just months before. Was her husband being deceptive? Maybe. BUT experience has led me to believe that these catastrophes are often the result of poor communication.
It’s critical to every adult’s financial wellbeing (not to mention their relationships) to know the specifics of their accounts, assets, and debts. I recommend a very simple family balance sheet which is nothing more than the value of a family’s assets (including collectables and heirlooms of value) minus its debts The family balance sheet should include who owns each asset. Doing this creates clarity by allowing both parties to ask questions or voice concerns about anything listed on the balance sheet. Every adult deserves to understand where they stand financially. (You can find a simple, free balance sheet template here: https://www.ramseysolutions.com/budgeting/useful-forms just click on “Consumer Equity Sheet” to download).
They Put the Needs of Others Ahead of Their Own
My wife and I met in our mid-20’s. She likes to joke that when she saw my apartment for the first time, the verse in Genesis that says, “It is not good that man should be alone.” came alive. I was the proud owner of a desk (for my computer), a bed, and a lawn chair and… that’s it. Why would a 26-year-old guy be content to eat dinner in a lawn chair? Because it’s all I needed, and I wanted to max out my 401(k)! It wasn’t until after we got married, that my wife’s priorities started to create a more balanced living arrangement. Investing was no longer my only priority and that was a very good thing!
Fast forward 10 years to when we bought our first house. This would be one of the biggest economic decisions of our lives, and we were concerned about very different things. Not surprisingly, I was concerned about economics: our debt-to-income ratio, comparable home prices, how old the roof was, and so on. My wife was thinking about the size of the rooms, how comfortable we’d be there, a yard for the kids to play in, and the safety of the neighborhood. In short, she was weighing the more human elements of this economic decision which, again, was a very good thing.
Women have a unique ability to look at the more complex and human variables of a decision. While this can be wonderful for the people they care about, it can lead them to value the needs and well-being of others at the expense of their own when making economic decisions. It is not uncommon for me to work with women who are working well past retirement age to pay for their adult children’s education or paying for their adult child’s mortgage while saving far less than necessary for their own retirement. These are GOOD things, but sometimes the BEST thing is to prioritize one’s own economic well-being. It’s similar to making sure your oxygen mask is secure before helping others on the airplane.
They’re Not as Confident as They Should Be
This is a big one! In fact, I believe this is the greatest financial challenge women face today. I know that’s a bold statement given other serious economic issues like wage disparity and the heavy toll that unpaid caregiving puts on women. The great irony is women make less during their working lives and have less saved for retirement than men, and they tend to be better investors. Women are naturally more focused on the long-term effects of a decision, so they’re much more likely to develop a plan and stick to it than men and yet, too many women do not feel confident enough to participate in the financial planning process or speak up when they have a concern. This mistake is a real problem for both men and women! This is like having Scottie Pippen and Michael Jordan on your team and only putting one of them in the game! As good as those two men were, they were far better together.
Furthermore, women’s lack of financial confidence can be a direct contributor to each of the preceding mistakes listed in this blog. If a woman isn’t confident in her ability to respond effectively to a financial setback, she may overspend on guarantees. If a woman isn’t confident in her ability to whether a downtick in financial markets, she may not take the risk she needs to grow her nest egg. If a woman isn’t confident about discussing finances, she may shirk the tough conversations and not demand accountability from her partner. Finally, if a woman isn’t confident, she may not be willing to consider that her own needs should take precedence when thinking of ways to help the people she loves or when making other important economic decisions.
The cure for a lack of financial confidence is to become disciplined in setting clear, meaningful goals, prioritizing those goals, and developing a living breathing plan to achieve those goals. For example, the planning process helps clarify how much to spend on guarantees and how much investment risk is necessary to reach a given goal. It facilitates important communication by getting all financial assets and debts out on the table. It also helps find balance between both the human and economic impacts of a given decision. If a person knows what their monthly expenses are and how much they need to save to reach their goals, they’ll know how much of their budget they can allocate to various types of insurance and what kind of help they can afford to give their loved ones. With clarity comes confidence. Women who have a clear idea of where they are financially, and where they’re heading, will gain the confidence they need to protect themselves from these and other common retirement mistakes. Partnering with a financial advisor and/or your spouse is a great way to develop a plan to reach goals and increase your confidence in a truly meaningful way.
