The financial planning needs of women are in many ways unique – and with the shape and pace of their career trajectories being somewhat different from men’s, so too should their financial management strategies. In this article, we explore the many ways in which women’s financial positions and needs can differ from those of men, and how women can strategically plan their finances to protect their financial futures.
Child bearers and family carers
The interruption of women’s careers as a result of childbirth and child-rearing can have long-term financial implications for women. Besides the actual loss of earnings during maternity leave and child-rearing years, it is important to factor in the knock-on financial effects. For example, missing out on a promotion and salary increase can mean lower group life and disability cover, reduced bonuses and/or commissions, loss of future earnings, lower pension fund contributions, plus a less powerful bargaining position when negotiating the next pay increase or job offer. Further, it is important to understand the long-term effects of interrupting compound interest when a woman is required to put her savings on hold and/or access her invested capital while on maternity leave. Over and above caring for children, women generally spend more time caring for other family members such as ageing parents or special needs siblings which often requires taking time out of the workplace or from income-generating activity which, again, can have longer-term financial consequences which are often not accounted.
The longer-term impact of not having pay parity
Although gender pay parity is improving, the process is a slow one and on average women still earn less than men do. Again, the effect of earning a lower income permeates across every aspect of a women’s portfolio: less group risk cover, lower investment contributions, reduced bonuses, commissions or incentives, a weaker position to negotiate from, less access to credit and financing, a weaker capacity for wealth building, and a lower net asset value over time – exacerbated, of course, by the fact that women generally live longer than men and therefore need to save for a longer – potentially more expensive retirement.
The associated risks of living longer
According to the US Census Bureau, in 2017 the life expectancy for men was 76.1 years while that of women was 81.1 years, and it is anticipated that the gap in longevity will continue to grow. The longevity risk faced by women has a number of key implications for their financial planning which should be addressed sooner rather than later. Firstly, while women generally have a longer investment horizon, investment growth is often thwarted as a result of career interruptions. Secondly, although women need to save more than men as a result of a longer period of retirement, the disparity in earnings often makes this difficult to achieve. Further, while a longer investment horizon should allow women to take on more investment risk, research shows that women generally tend to not have sufficient growth assets in their portfolios which, in turn, reduces the purchasing power of their capital over time. Outliving men also means that women need to face the reality that they are likely to be solely responsible for the management of the finances later on in retirement – while living longer also increases the likelihood that they’ll need frail care or home nursing, which can be prohibitively expensive.
Wealth creation challenges of the stay-at-home spouse
Women who choose to stay at home to raise children face an enormous challenge when it comes to generating wealth. Without an income and the associated tax benefits, investing is something that many stay-at-home mothers fail to do which places them in a precarious financial position if the relationship comes to an end. The economic value of a stay-at-home spouse remains hugely undervalued by society, and the inability of stay-at-home mothers to create wealth is something that needs to be addressed. While there are laws in place to protect the economically weaker spouse in the event of divorce, stay-at-home parents often find themselves in a financially weaker position after divorce than the spouse who chose to remain economically active during the marriage. As such, it is essential that women put mechanisms in place to protect their financial interests should their marriage come to an end. Women should pay particular attention when choosing a matrimonial property regime and preparing an antenuptial contract.
Challenges facing single mothers
The challenges that many single mothers face can have far-reaching effects on their ability to generate income and build wealth, particularly when it comes to securing maintenance and pursuing payment from non-payers. The non-payment of maintenance forces many single mothers to incur ongoing legal costs and enter a cycle of debt – exacerbated by having to take time off work to attend maintenance court which in turn causes further loss of income and reduced employment opportunities. This conundrum causes many single mothers to end up heavily indebted, unable to reach their full earning potential, and incapable of investing for the future.
Differing investment style
Generally speaking, women’s investment style differs from men’s, and this is often not supported by the products or advice available in the marketplace. Research shows that women are more likely to seek advice and stick to it, have a more goals-based approach to investing, and – being time-poor – require efficiency in terms of communication and administration. While generally not as confident as their male counterparts when it comes to investing, women tend to take on less investment risk which, given their longer investment horizons, often translates into inadequate returns. That said, women investors are less likely to succumb to marketing timing and over-confidence bias, and more likely to do extensive research before making investment decisions. When it comes to seeking advice, women want to have their goals heard and understood, and don’t want to feel pressured into buying a product.
The work-from-home regulations during the pandemic placed a massive child caring burden on many women which, in turn, impacted their ability to generate an income and save for the future. In response to the pandemic, however, many women have subsequently demonstrated an increased interest in investing, become more involved in the management of the household’s finances, and are more open to engaging in financial discussions with their partners and children. A heightened awareness of mortality has also increased their interest in estate planning, providing for minor children and loved ones, and creating a financial legacy in the event of death.
When it comes to planning for the future, research is clear: those who have a financial plan in place, save more. With this in mind, women should be encouraged to take concrete steps early on to strategically manage their finances through the various life stages that are unique to women. A positive first step is to find an independent, fee-based advisor who understands and appreciates the specific needs and challenges that women face, and who demonstrates a genuine understanding of your lifestyle goals. Together with your advisor, you should be able to develop a long-term strategy for financial independence which is flexible, robust and tailormade for your unique purposes.
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