What you need to know to take control of your financial future
Tanisha A. Sykes
When it comes to investing, women and men have different strengths. While women earn less than men, they invest a larger percentage of their paychecks annually—9.0 percent versus 8.6 percent for men, according to Fidelity Investments. Men tend to take more risks, but women are better at investing.
One factor, according to Fidelity, is that men are 35 percent more likely to make trades, and the resulting fees diminish their portfolios more than women’s. Also, women save more, nearly 1 percent more annually in 401(k)s, IRAs, and brokerage accounts. Another advantage: Women assume less risk by not strictly investing in equities. Instead, they invest in vehicles like target-date funds, which are structured to grow assets to address a future need such as retirement. In other words, women tend to stay the course even when the ride is a little bumpy, as one Betterment study found.
Despite women’s investing prowess, they still earn just 80 percent of what men do according to a 2018 report from the American Association of University Women (AAUW). As a result, women receive less than men from Social Security, pensions, life insurance, and disability income because these benefits are typically based on earnings, according to the AAUW survey. This impacts their economic security. In fact, the lifetime earnings of women are $1 million less than those of their male counterparts at retirement, according to new research from Bank of America Merrill Lynch.
What’s more, nearly 52 percent of women lead single households, and saving for retirement is often solely on them. Therefore, women, even at the most senior levels, have some ground to make up.
Investing your money is an integral part of your financial security. Even if you use the services of a financial advisor, be prepared to stay in control of your investments with this comprehensive guide.
Learn the lingo One of the most frustrating parts of starting a new journey as an investor is encountering terminology you don’t know. Try sites like Investor Junkie and The Balance for a list of common terms and definitions to boost your investing know-how.
Set clear financial goals “Whether you’re single or in a committed relationship, take the time to visualize how retirement will look,” says Nadine Gordon Lee, CPA/PFS, CFP, and a coauthor of Personal Financial Planning for Executives and Entrepreneurs: The Path to Financial Peace of Mind. Consider some questions: Where will I live? How will I spend my free time? Will I work part-time? Then, write down the life goals you want to achieve such as:
• Retiring early • Taking annual luxury vacations • Funding children’s/grandchildren’s education • Living in a dream location • Giving generously to charity • Leaving a legacy for your children
“If you are having challenges articulating a clear vision of retired life, speak to an advisor to help you resolve internal conflicts and figure out a path forward,” says Lee.
Complete a financial plan At a minimum, says Lee, your financial strategy should including the following:
• Net worth statement. This statement outlines what you own minus what you owe. If your assets, such as equity in a house, car, investments, and art, total $545,000, and your debt, including credit cards, a car payment, and a mortgage, totals $300,000, then your net worth is $245,000. • Current investment allocation. Determine which mix of asset categories, like stocks, bonds, and cash, to hold in your portfolio. • Cash flow needed during retirement. Review debts and expenses as well as investments to figure out how much you will need to retire comfortably. • Long-term analysis. This category covers cash inflows, outflows, and wealth accumulation. • Monte Carlo analysis. This computer-generated, randomized analysis will give you a better idea if your retirement is sufficiently funded or if additional savings are needed after taking into account potential market volatility, says Lee. • Sources of guaranteed income. Take into account pensions, annuities, Social Security, and variable income such as brokerage accounts, IRAs, and 401(k)s. • Estimate of future taxes owed. An advisor can help you determine any taxes owed on tax-deferred savings and other variable income.
Once the above items are in place, Lee advises, stress-test your plan: “Run a variety of ‘what if’ scenarios like retiring early due to a layoff or poor health or supporting a child or parent in need.” Knowing how these events can impact your finances will help you plan.
Invest in wealth escalators The 401(k). Senior-level executives likely have a 401(k) or similar employer-sponsored retirement plan but may not know how to maximize their hard-earned savings. “Maxing out your retirement contributions is a good way to ensure you’re building wealth and allows you to get the best bang for your buck,” says Andrew Westlin, CFP, financial planner at Betterment.
Also, check your contribution rate and save enough at least to get the company match. If your plan offers auto-escalation—a feature that automatically increases an employee’s contribution amount—take advantage of it to increase your savings, says Westlin.
The traditional IRA. There are three real wealth benefits to investing in IRA plans:
• Contributions are made on a pretax basis. “The full amount of your contribution is added to your retirement account without tax being deducted from it,” says Hilary Tuohy, certified divorce financial analyst at New Leaf Financial Advisory in Sausalito, California. • Contributions grow on a tax-deferred basis. “All of the capital gains and dividends earned during the investment period grow tax-free,” says Tuohy. “The compounding effect on your entire investment maximizes the benefits.” • Contributions are matched. You’ve heard this before, and you’ll hear it again. Take the company match; otherwise, you are leaving free money on the table!
The Roth IRA. What makes the Roth different is that contributions are made after taxes are taken out of your paycheck. “Withdrawals from Roth IRAs are therefore tax-free in retirement as long as you are 59½ and have held the account for at least five years,” says Tuohy.
The HSA. Studies have shown that a retired couple will need nearly $280,000 for health-care costs in retirement, not including long-term care. Therefore it’s wise to contribute to an HSA (Health Savings Account), a tax-favored savings plan to help pay for medical expenses. “Compared to a 401(k), a 403(b), an IRA, or the Roth, the HSA is the only account that offers triple-tax savings on contributions, earnings, and distributions,” says Cheryl Washington, senior financial advisor at Merrill Lynch in Chicago. Even better? The funds are portable from one employer to another, and they roll over annually, allowing you to grow your account over time. Maximum contribution limits for 2018 were $3,450 for individuals and $6,900 for families.
The stock option. These investments offered by employers give you the right to buy a specific number of shares of your company’s stock during a time and at a price that your employer sets. Let’s look at a hypothetical example on a call option from Company X. The stock is currently trading at $10 a share. Owning the call option gives you the right, but not the obligation, to purchase 100 shares of Company X at $10 a share anytime in the next three months. If the stock rises to $20 a share within that time period, and the employee decides to sell the options, that’s a profit of $10 a share times 100 shares for a total of $1,000.
Don’t go it alone Even if you are comfortable with financial matters and are eager to try your hand at investing, you may want to consider hiring a financial planner or what is known as a “robo-advisor.”
Robo-Advisors At any stage in your career, you can benefit from the smartest technology available to help you invest for retirement. Robo-advisors use computer algorithms and advanced software to provide low-cost, automated, financial planning services.
The largest robo-advisors include the Vanguard Group, Charles Schwab, and Betterment. Schwab’s program lets investors get started with $5,000, solicit help from professionals 24/7, and pay no advisory fees and no commissions.
Most robo-advisors offer the following services:
• Asset allocation of your investments • Automated rebalancing of your portfolio • Tax-loss harvesting—selling a security that has experienced a loss to offset taxes on gains and income “Robo-advisors are programmed to optimize your investments based on quantifiable research to maximize your expected returns,” says Westlin.
Financial Planner A financial planner is a real person you meet with (or talk to) who studies your financial situation and goals and offers personalized advice. Before hiring a financial planner, interview several people. Here are five questions to ask:
- Are you a fiduciary? The answer should be “yes.” A fiduciary is required to act in your best interests by putting your needs before the company’s guidelines.
- How much are your services? Typically, you will pay a percentage of assets under management. The typical fee is 1 percent of assets under management per year. The fee is often higher for smaller balances (starting at $5,000) and decreases as your balance grows.
- What services do you provide? Advisors offer investment management, income tax preparation, and estate planning and customized plans involving inheritance management.
- What is your strategy for working with me? You have to believe in what the planner is doing to stay the course. Find an advisor who has worked with clients with a similar financial makeup as yours, so that you are confident the advisor can meet your goals for the long term.
- Who is your custodian? Ideally, your financial advisor has hired an independent custodian to hold your assets, rather than acting as your custodian, which happened in the multibillion-dollar Bernie Madoff Ponzi scheme. This is an additional security check for you and your funds. Next, make sure you are comfortable with the person you are considering and the firm she or he works for. A 2017 study by GuideVine—a service that connects people to financial advisors—revealed that only 49 percent of Americans think advisors are trustworthy. “Financial advisors have a fiduciary duty to clients, meaning they are legally obligated to put your interests first,” says Tuohy. Adds Sara Rajo-Miller, an investment advisor with Miracle Mile Advisors in Los Angeles: “Choosing an advisor is not about who looks perfect on paper, but rather someone who will tailor their approach based on your goals and needs.”
- Before investing a single cent, check out an advisor’s credentials. Step 1: Ask which agency oversees the advisor’s credentials. The answer should be FINRA or SEC. FINRA stands for Financial Industry Regulatory Authority. SEC means Securities and Exchange Commission. • FINRA advisors hold a securities license, or perhaps several. You can use the BrokerCheck feature on FINRA’s site to get a snapshot of the advisor’s employment history and any complaints. • SEC advisors are “an individual or a firm that is in the business of giving advice about securities,” according to SEC.gov. You can conduct an Investment Advisor Search to review any disciplinary actions. Step 2: Ask which designations the advisor holds. There are myriad designations that an advisor could hold, including CFP (certified financial planner), CFA (certified financial analyst), and CPA (certified public account). FINRA has a page called Professional Designations to help you identify what the acronyms mean, along with the education required to obtain the credentials. Winning financially requires educating yourself, choosing a select team of experts, and taking more risks. When you are armed with the right information, your retirement acumen and your nest egg will grow. DW