Women live longer on average than men but make significantly less money over the course of their careers. A May 2020 report from the National Institute for Retirement Security found that women earn roughly $0.80 for every dollar that men earn in wage work. This gender wage gap leads to significant retirement shortfalls for women who will need their retirement savings to stretch for a longer period of time. Closing the gender wage gap is a slow process, one made worse by disproportionately large job losses for women during the coronavirus pandemic. However, there is a second gender gap that also deserves our attention.
The gender investment gap is the difference between the amount of money the average woman earns on her investments throughout her lifetime compared to the average man. In some cases, the difference can be close to $1 million by retirement.
What Contributes to the Gender Investment Gap?
The gender wage gap, particularly for women of color, is a major contributor to the gender investment gap. Women need to invest a larger percentage of their income to match the real dollar amount invested by their male counterparts. The wage gap is particularly pronounced for black and Latinx women, who respectively make 21 percent and 31 percent less than white women.
Women are more likely than men to take time out of the workforce or reduce work hours to take on unpaid caregiving responsibilities for children and aging parents. The coronavirus pandemic has acerbated this problem as large numbers of women left the workforce to shoulder caregiving responsibilities. National Women's Law Center reported in September of 2020, 865,000 women left the labor force—more than four times the number of men who exited the workforce that month. Many more women reduced their hours. Overwhelmingly these are women who would otherwise have remained in the workforce had childcare been available. Time off from the paid workforce results in lower career earnings, less chance to accrue funds in employer sponsored retirement accounts, reduced Social Security at retirement, and a difficult time reentering the workforce in the future.
Women are more likely to keep their assets in cash than men. In a 2016 Global Investor Pulse survey from BlackRock, women kept 71 percent of their portfolios in low-return cash savings, compared to 60 percent for men. Cash-holdings are seen as low risk and are insured by the FDIC. However, due to inflation and low savings rate, money kept in cash loses value year over year. When the stock market has returned an average 10% return since 1926, cash holdings represent a loss opportunity of earnings.
The investment industry is predominantly male dominated, which can make investing unappealing to some women. According to 2015 data from Morningstar, fewer than 10% of money managers at mutual funds and exchange-traded funds are women. In comparison, that same year, women made up 37% of doctors, 33% of lawyers, and 63% of auditors and accountants. Financial planning models default to men’s salaries and life experiences and use language geared towards male clients. Financial goals are often discussed using sports, war, and construction metaphors that don’t resonate with female clients or make them feel welcome in the male-dominated industry. The industry often views women as risk-averse and not interested in investing, which is not the case. Women prefer more financial education prior to investing and want to understand the risk involved. Firms that make an effort to cater to female clients can draw on a vast and underserved market.
What Happens When Women Invest?
In general, women tend to be more successful than men when they do invest. Fidelity Investments found that women outperform men in long-term investing, with women earning on average 0.4 percent higher returns than men in the 2016 calendar year. A 0.4 higher return carried over a long period of time can yield significant gains. For example, if you invested $10,000 per year for 40 years at 7% interest, you would end with just under $2 million. That same $10,000 per year earning 7.4% interest would yield you over $2.2 million at the end of 40 years – an over $200,000 difference from an 0.4% increase in returns. Other studies put the average return for women even higher, including one by Warwick Business School that showed female investors outperforming their male counterparts by an average of 1.8 percent over a three-year period. Despite higher returns, just 9% of women think they are better investors than men.
Female investors are more likely to take a long-term, goal-oriented approach to their investing. Women trade less frequently and hold their investments for a longer term. When the market dips, women are less likely to pull their assets out. In the same 2016 Fidelity survey, men were 35 percent more likely to trade than women. Frequent trading incurs additional trading costs and gains are taxed at a higher rate – the short-term capital gains tax is equivalent to your income tax rate, which is often much higher than the 15 percent long-term capital gains tax rate.
The Fidelity study also found that women are more likely to invest in target-date funds, which are well diversified and automatically adjusted to an appropriate risk level for the investor’s age. Women are less likely to have all of their retirement savings in stocks, which is an inherently risky asset.
Merrill, a Bank of America company, found that women’s investing confidence increases significantly as their assets increase. Only 43% of women holding less than 100k in assets expressed confidence in their investing, compared with 65% of women holding 100k-240k in assets and 75% holding 250k or more in assets. The more women invest and see their assets grow, the more comfortable they feel with their investing acumen.
How Can Women Avoid the Gap?
Individual women can avoid the gap by investing early and often. The easiest place to start is often an employer-sponsored 401k or other retirement account like an IRA. Retirement accounts typically offer target-date funds that take care of balancing the portfolio of new investors. Many companies offer matching programs where the employer will contribute additional funds to match employee contributions, up to a certain amount. Retirement accounts typically grow tax free, allowing for increased gains over a long period. Due to the power of compound interest, investing as much as possible early in your career will yield a significantly larger nest egg than investing the same dollar amount later on. For example, investing $100 a month starting at age 25 will result in a nest egg of $265,702 at age 65, assuming a 7% rate of return compounded monthly. Waiting until age 35 to start and investing $200 per month until age 65 will result in a nest egg of $247,079 at the same rate of return – a smaller nest egg despite more money invested.
Women who are ready to expand their investments beyond their retirement accounts will often benefit from working with a financial advisor who shares their philosophy and supports their goals. A financial advisor can help craft a strategy to invest for a home purchase, college education, travel, charitable giving, retirement, or whatever else matters to the individual investor. When choosing a financial advisor, women can look for firms that include women in their teams. Meet with potential advisors to ensure that you feel listened to by the advisor and that the advisor’s investment philosophy lines up with your own.
The biggest investing mistake one can make is not getting started.
How Can We Close the Gap for Future Generations?
While individual women can close the gap by expanding their own investments, the gender investing gap is a societal problem requiring industry and society-wide solutions.
The financial industry can work to recruit women to the industry through college scholarships, internships, and mentorships. Some – although not all – women prefer to work with a female advisor. Mentoring in particular provides a strong talent pipeline to both recruit and retain talented women to their teams.
Financial service firms can adapt their approach to advertising and recruiting clients. Firms can offer a holistic approach to wealth management and focus on the goals of their female clients within the context of providing for their overall lifestyle. Recognizing that a one-size-fits all approach does not work will help to remove some of the barriers to attracting female clients. Women often seek advisors who offer a personalized experience - educating and empowering women to make their own financial decisions rather than trying to pigeon-hole them into an existing structure. Over three-quarters of women say they see money in terms of what it can do for their families (U.S. Trust. Insights on Wealth and Worth, 2017). For many women, personal goals drive performance.
At a societal level, encouraging financial literacy programs will help women feel more confident to invest. Recruiting more women to male-dominated, high-pay industries, particularly financial services, will help level the playing field for female investors. Policies that allow women to continue their careers while caregiving can help prevent women from losing out on some of their highest earning years, including robust family leave policies, access to safe, affordable childcare, mentorship programs, flexible hours and remote work opportunities.
According to Pew Research, about 40% of women out-earn their spouses. Due to longer life expectancies, delayed marriage, and divorces, a whopping 90% of women will be the sole financial decision maker for their household at some point. Closing the gender investment gap will ensure a more comfortable future for those families while introducing more capital into the market. Eliminating the gender investment gap isn’t just good for women – it’s good business.
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