Ask a woman her opinion about the current financial situation and you're likely to hear more about unethical behavior on Wall Street than an assessment of her personal financial situation.
Rather than ask why women process information the way that they do, I wonder whether the result of such thinking may be a symptom of what I perceive as an upcoming financial tsunami that will severely damage the well-being of women, especially older women, unless the issue is addressed - and addressed quickly. Consider that
Women earn approximately 80 cents to the dollar that men earn
Women, on average, spend 11 years outside the workforce as an unpaid family caregiver
Women, by enlarge, are less risk tolerant with their investments than men
Women live longer than men.
This is the recipe for disaster.
Meet Sandra, a 45 year old self-employed public relations representative. She earned $45 thousand in 2007, and projects that she will earn $40 thousand in 2008, as her clients cut back their spending. She is the single mother of a six year old daughter, owns her own home, and has contributed to an IRA every year since 1995.
This retirement plan is invested in 25% stock funds, 40% bond funds, 5% foreign funds and 30% money market funds. She has contributed $2000 every year to her plan, which is now worth $31,800. Her home is currently valued at $335 thousand.
When Sandra is retired at 65, she can expect to have saved $150.5 thousand and her home, paid in full, to be worth $600 thousand.
Sandra can expect
Approximately $2000 per month from Social Security
Approximately $600 per month from her investments
In today's dollars, that is spending power of about $1,300 per month (inflation doubles expenses about every 20 years). Let's look at her current expenses, and see how her retirement is likely to look.
Mortgage $0 (will be paid off by the time she's retired)
Property taxes/ insurance $300
Transportation $200
Food $600
Health care $300
Already, Sandra is $100 over budget, without allowing for paying taxes, ongoing home repairs or ANY extra money for incidentals. She'll likely be forced to sell her modest home and buy (or rent) one that is smaller, using some of her equity to provide for ongoing expenses. Her retirement years will be, at best, modest.
Yet, Sandra is better prepared than the vast majority of women.
So, while we blame, deride and rebuke hedge fund managers, investment bankers and regulators, let us also consider this.
Inflation cuts our spending power in half every 20 years
Investing in stocks and real estate, while volatile, provide the best return for long term money in excess of inflation
Violent corrections in both the stock and real estate market are not only predictable events, but great long term buying opportunities
Money grows MUCH faster in tax-deferred accounts, such as 401(k)s and IRAs
Don't let Sandra's story be yours. Don't think it's too late, it's too risky, it's too boring or it's too hard. The time for women to take charge of their financial lives is now.
