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The percentage of women in the workforce has increased significantly over the past few decades. Women accounted for only 32.7% of the U.S. labor force in 1948, but by 2016, the percentage grew to 56.8%.1 Women have especially made notable gains in professional and managerial occupations. In 2016, more than one in three lawyers was a woman, compared to less than one in 10 in 1974. Furthermore, women own close to 10 million businesses in the United States, which accounts for $1.4 trillion in receipts.2
Recurring Themes
The continued growth of financially successful women presents practitioners with an opportunity to address a unique set of planning circumstances that may not be as prevalent with male clients. Some recurring themes that arise when working with women include:
1. Longevity risk: In 2016, the life expectancy for U.S. females was 81.1 years, as opposed to 76.1 for U.S. males. Not only are women living longer than their male counterparts, but also this life expectancy delta is actually growing.3
2. Transition: Approximately two-thirds of women between the ages of 40 and 79 have experienced a major financial transition in their lives, including divorce, widowhood or becoming the primary caregiver for a parent or spouse.4 Women may also experience transitions at the beginning of their careers if they leave the workforce for childbirth or to raise children.
3. Investor psychology: There have been various studies, in both finance and other fields, illustrating how women are more risk averse than men. This has a direct impact on the way women manage their finances.
4. Delegation of financial decisions: Despite continued financial success and independence, 56% of married women still delegate money-related decisions to their husbands.5
Marriage and Divorce
Planning for both marriage and divorce has evolved over time. According to the U.S. Census Bureau, in the past 50 years, the average age of women marrying for the first time increased from 20.8 to 27.8.6 Primary factors for this trend include the growth of educational and employment opportunities for women. Consequently, women are entering into marriage with more assets and greater earnings potential than ever before. On the flipside, divorce has become a reality for millions of women. Given the changing matrimonial landscape, practitioners must advise their female clients to consider the impact evolving gender roles has on marriage and divorce.
Prenuptial agreements (prenups). A prenup is an attractive option for women seeking to protect their premarital assets and future career or business prospects. In a prenup, a couple can agree on terms that would complement their anticipated family structure. For example, both spouses may work during the marriage and possess similar financial means. As a result, they may prefer to enter into a prenup that provides that their earnings would remain separate on divorce. Alternatively, a couple may opt for an arrangement in which one spouse works outside of the home and the other spouse primarily raises the children. Accordingly, the couple may prefer to split the assets accumulated during the marriage and provide for spousal support in the event of divorce. With the largest intergenerational transfer of wealth taking place, the role of women in managing and safeguarding family assets shouldn’t be overlooked. Protecting gifts, inheritances and family businesses are significant benefits that women may glean from prenups.
Divorce. Over time, divorce laws have become gender neutral. Women are no longer given priority regarding custody. Rather, there’s a presumption of joint custody in many states. Property division is determined based on state laws instead of by title or who earned the money. Spousal support rules vary by state, but may be payable to or from either party, regardless of gender. Most states have a statutory formula for calculating the presumptive amount of spousal support, as well as enumerate factors on which a court may deviate upwards or downwards. Under the new norm, a woman may earn more than her spouse during the marriage and have to pay spousal or child support on divorce. In addition, there are usually guidelines governing the duration of spousal support. There’s a trend away from permanent spousal support awards to durational awards. The rationale is to enable a spouse to become self-supporting within the established timeframe. However, in practice, this may produce harsh results to a spouse who’s been out of the workplace for a long time or never worked. In marriages adhering to more traditional gender roles, homemakers may be unable to maintain the marital lifestyle post-divorce under laws that place an increasing emphasis on self-support.
Gray divorce: The term “gray divorce” was coined to describe individuals 50 and older who are getting divorced. At any age, divorce can have devastating financial consequences. However, it can be especially difficult when it happens later in life.
Special considerations exist for women getting gray divorces. Many women in this age group have been out of the workforce for a long time or earn less than their spouses. As a result, they may be dependent on their exes for financial support or maintaining and paying for health insurance coverage after a divorce. Additionally, if married for over 10 years, they may qualify to collect Social Security based on their former spouse’s employment record. The divorce settlement may constitute the primary or sole source of funds for retirement, so it’s crucial for it to be properly managed.
Women are more financially independent now than at any time in history. However, women still have a tendency to leave financial decisions to their spouses. It’s important for practitioners to educate their female clients on all aspects of planning early in their careers. Encouraging women to take control of these decisions will lead to a much smoother transition should a marriage disintegrate.
Investor Psychology
The field of behavioral finance analyzes the limits of our self-control and how we’re influenced by our biases. This is especially true when it comes to the psychological differences between how men and women approach investing.
Risk aversion: Many studies have shown that women are more risk averse than men. In fact, according to a BlackRock study, only 38% of women are willing to increase their investment risk to achieve higher returns, compared to 56% of men.7 Investing conservatively can be a prudent way to preserve capital if an investor has short-term goals. However, when planning for the long term, such as retirement or leaving a legacy, being too conservative is not only imprudent but also can prevent clients from achieving their objectives.
Biases: While the term “bias” has a negative connotation, the reality is that certain predispositions can be beneficial. In the paper “Boys Will Be Boys,”8 the authors found that investment accounts owned by women outperformed those of men. Overconfidence caused men to trade 45% more times than women. The combination of trading costs, taxes and quest to outperform contributed to reducing men’s returns by 2.65% annually as opposed to 1.72% for women.
Men’s tendency to move things around doesn’t only apply to trading. It also applies to staying the course with other investment strategies. The best approach to investing is a disciplined process that the client will stick with over the long term. Women’s discomfort with risk, but tendency to trade less frequently, is in stark contrast to men and requires a different approach. Financial advisors should spend more time with women discussing risk and its ramifications, while they can spend less time emphasizing the importance of staying the course and trading less. These small differences can lead to big benefits over a multi-decade time horizon.
Retirement Planning
The challenges women face when planning for retirement contribute to the fact that women 65 and older are twice as likely to live in poverty than men of the same age.9 Understanding these obstacles and planning accordingly is the best way to overcome them.
Sequence risk: The order of annual investment returns or annual withdrawals is a major concern for retirees who are living off income from their investments. This risk is magnified for women who need their assets to last for their longer lifespans. If a female client experiences a 3-decade retirement, but has a string of lower-than-expected returns or takes larger withdrawals early in retirement, the timing may have significant financial ramifications in the decades to come.
Social Security credits: Women represent over 50% of Social Security beneficiaries in their 60s and 70% in their 90s. They make up 96% of Social Security survivor beneficiaries.10 However, time away from work, given women tend to leave the workforce more than men, can cause them to earn fewer credits toward Social Security benefits. In fact, in 2015, the average annual Social Security retirement benefit for women was $14,184 versus $18,000 for men.11
Retirement assets: Studies have shown that women have nearly 50% less retirement savings than men.12 One cause is that women miss out on contributing to company Internal Revenue Code Section 401(k) plans and the matching opportunities while they’re out of the workforce. Another reason for the disparity may be attributable to the gender wage gap, which is the difference between the median annual pay for women and men who work full time and year-round. The wage differential is the result of occupational segregation, bias against working mothers and direct pay discrimination. In some high paying jobs, women collectively are receiving billions less than their male counterparts. For example, women physicians are paid $19 billion less annually than men in the same occupation. There’s no doubt that receiving 25% to 30% less pay in some professions can impact cash flow and, in turn, retirement savings.13
Financial advisors are tasked with crafting a plan to tackle these challenges for both the accumulation and decumulation phases of retirement planning. Some approaches may be related to lifestyle, investments or cash flow strategies. These include delaying retirement or working part time while in retirement, planning for a worst-case rates of return scenario, diversifying away from volatile investments at certain stages of retirement or continuing to save while already in retirement. Exploring all these options in a proactive way is imperative for many women to secure their financial future.
Long-Term Care Planning
Rising long-term care (LTC) costs is an issue facing all Americans. The fact that, on average, women live longer than men and are the primary caregivers for their spouse causes them to face an increased burden. It’s critical for women to plan for the likelihood that nursing home or long-term home care will be needed. To ensure that they’ll have sufficient resources to pay for their LTC needs, women should explore the following options:
Private pay care: Paying out of pocket for LTC costs is a realistic option for high-net-worth families and an inevitability for folks who don’t appropriately plan. However, monthly nursing home costs can be prohibitively expensive, ranging between $7,500 and $20,000 depending on one’s location. This cost can cause many Americans to wipe out an entire lifetime of savings in the event of a significant LTC need.
LTC insurance: Traditional LTC insurance or a hybrid policy is an excellent option for many individuals. It’s especially useful for female clients, whose cost of care is likely to be more expensive due to living longer and lack of care provided by a spouse (who may already be deceased). If insurance is purchased while an individual is relatively young and healthy, it can significantly help defray the costs of care when needed. The downside is that many policies purchased today are very expensive relative to how they were priced in the past. Moreover, because of medical underwriting requirements, many people may not be eligible due to a past or current health situation. Clients may also have a policy whose daily benefit is far eclipsed by the actual cost of care.
Medicaid planning: For those who aren’t candidates for the aforementioned options, the Medicaid long-term/chronic care program can be a savior. To qualify, the individual must meet asset and income requirements, which vary by state. For example, in New York, perhaps the most generous of states, an individual applying for Medicaid can have no more than $15,450 in non-exempt assets. In other states, that asset threshold may be as low as $2,000. Furthermore, most states impose a 5-year lookback on transfers. Therefore, it’s critical for Medicaid planning to start early.
Because women live an average of five years longer than men and bear the burden of care and associated costs, their LTC planning needs are greater than men’s. For women to plan appropriately, it’s important to start the process by their 60s. The earlier they start, the more options they’ll have available.
Estate Planning
Statistics show that the majority of women will be managing their estates on their own, at some point in their lives, due to outliving their male partners or the increasing likelihood of becoming divorced or choosing to remain single. Furthermore, many women may accumulate wealth from multiple sources, including inheritance from both parents or a spouse and by creating their own wealth as business owners or professionals. Based on a woman’s marital situation and financial status, there are various items to keep in mind when arranging for the orderly disposition of her assets.
Affluent women: The U.S. estate, gift and generation-skipping transfer tax exemption amount available to U.S. citizens, as of Jan. 1, 2019, is $11.4 million per individual. Notably, this increased exemption amount is a “use it or lose it” opportunity, given that it’s scheduled to sunset after 2025, when the exemption will revert back to $5 million and will be indexed for inflation. Moreover, a Democratic administration in Washington in 2020 could push for the $3.5 million exemption currently being proposed by Bernie Sanders.
For women of means, deciding whether to gift their assets to loved ones to take advantage of the temporary increase in the exemption amount should include considering the level of their wealth, asset protection planning, the need for future access to gifted assets and the income tax consequences of transfer. For residents of states with a state estate tax, gifting during life using the exemption amount may enable those funds to escape a state estate tax that could otherwise have been imposed at death.
Married women: It’s important for married individuals to plan their estates to ensure that their spouses are adequately provided for in the event of disability or death. Again, because women tend to outlive men, they typically control the ultimate disposition of a couple’s assets. Couples in second marriages may have unique planning needs in that they need to plan around their marital status to protect their accumulated wealth and future income and to provide for their children, especially children from first marriages.
A spouse’s right to inherit the assets of a deceased spouse depends on state law. It’s important that married couples understand these laws, as well as the gift and estate tax benefits available to married couples, when creating their estate plans. Specifically, there’s no federal or state estate or gift tax on transfers between U.S. citizen spouses due to the unlimited marital deduction. When appropriate, married couples need to plan their estates to combine the estate tax exemption granted to each person with the unlimited marital deduction to assure that no estate taxes are payable until the death of the surviving spouse. Spouses also need to seek advice regarding division and titling of assets to achieve desired objectives.
Single women: Single women need comprehensive estate planning to provide for their assets, loved ones, favorite charitable organizations and business interests. If an individual dies without a will or revocable trust, the courts will take control of the individual’s estate and distribute assets according to intestacy laws. All too often, particularly for single individuals, those who ultimately share in a decedent’s inheritance under the intestacy laws aren’t the same people who would have otherwise inherited the property had the individual died with a will.
It’s also important to keep in mind that unmarried couples don’t always benefit from the same spousal rights, tax incentives and legal presumptions as their married counterparts. For instance, couples who aren’t married may not take advantage of the federal unlimited estate and gift tax marital deductions, and they may be subject to gift tax for certain asset transfers made to their partners. An unmarried couple may not inherit at all under intestacy laws if a partner dies without a will.
Given the various forms of transition that women face, it’s important that practitioners encourage them to revisit their estate plan with every lifecycle event to ensure that they, their assets and their loved ones are all protected. This includes updating beneficiary designations for bank accounts, brokerage accounts, individual retirement accounts, annuities and life insurance policies to remove a deceased or ex-spouse and name a new beneficiary. To prevent an ex-spouse from inheriting assets and, thereby, potentially disinheriting other loved ones, women must update their wills and trusts. In addition, any previously executed documents naming a deceased or ex-spouse as an agent under a health care proxy or power of attorney should be voided, and new instruments designating the appropriate individuals to serve should be created.
Financial Goals
A Pershing study found that despite their differences, men and women share the same major financial goals.14 While the ultimate destination may be the same, the road to get there can be vastly different. Practitioners must be attentive to any specific concerns women express, as well as familiarize themselves with the unique challenges women face. The combination of listening and advanced planning is imperative to designing a strategy that puts female clients on track to achieve their financial objectives.
Endnotes
1. Mark DeWolf, “12 Stats About Working Women,” U.S. Department of Labor Blog (March 2017), https://blog.dol.gov/2017/03/01/12-stats-about-working-women.
2. Ibid.
3. Kenneth Kochanek, Sheryl L. Murphy, Jiaquan Xu and Elizabeth Arias, “Mortality in the United States 2016,” NCHC Data Brief (December 2017), www.cdc.gov/nchs/data/databriefs/db293.pdf.
4. Coryanne Hicks, “The Financial Challenges of Women in Transition,” U.S. News & World Report (March 18, 2019), https://money.usnews.com/investing/investing-101/articles/the-financial-challenges-of-women-in-transition.
6. www.census.gov/data/tables/time-series/demo/families/marital.html.
7. “BlackRock Global Investor Pulse Survey: American Women Face Saving for Retirement ‘Gender Gap’ with a Lasting and Harmful Impact,” Business Wire (March 5, 2015), www.businesswire.com/news/home/20150305005794/en/BlackRock-Global-Investor-Pulse-Survey-American-Women.
8. Brad M. Barber and Terrance Odean, “Boys Will Be Boys,” Quarterly Journal of Economics (February 2001).
9. Alison Burke, “10 facts about American women in the workforce,” The Brookings Institute (Dec. 5, 2017), www.brookings.edu/blog/brookings-now/2017/12/05/10-facts-about-american-women-in-the-workforce/.
10. “Policy Basics: Top Ten Facts about Social Security,” Center on Budget and Policy Priorities (Aug. 14, 2018), www.cbpp.org/research/social-security/policy-basics-top-ten-facts-about-social-security.
11. Stan Hinden, “Women and Social Security Benefits,” AARP (February 2017), www.aarp.org/work/social-security/info-2014/women-and-social-security-benefits.html.
12. Maurie Backman, “Why are women only saving half as much as men for retirement?” CNN Money (July 12, 2018), https://money.cnn.com/2018/07/12/retirement/women-men-retirement/index.html.
13. Deborah J. Vagins, “The Simple Truth about the Gender Pay Gap,” AAUW, www.aauw.org/research/the-simple-truth-about-the-gender-pay-gap/.
14. “Women: Investing With A Purpose,” Pershing (2015), www.pershing.com/_global-assets/pdf/women-investing-with-a-purpose.pdf.