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Retirement Planning: Are Women Less Risk Tolerant Than Men?

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Due to lower earnings, longer retirements and such demands as childbirth, child care and elder care taking them out of the workforce during their working years, women are less risk-tolerant investors than men.

At least that’s the idea parroted in the financial industry. But is it true?

The data is plentiful, but not quite conclusive. For instance, a Wells Fargo study on women and investing found that 21 percent of men – compared with 29 percent of women – classify themselves as “more conservative” in their investing habits, while 6 percent of men and 2 percent of women think of themselves as “more aggressive.”

The same study found that women often lower expectations for returns than men – and that, while half of all men believe the stock market is a good place to grow their retirement savings, just 26 percent of women believe the same.

Despite these different attitudes, actual returns don’t differ much between the two sexes. The Wells Fargo report found that women earned slightly higher returns, and a five-year Vanguard study showed a difference of only 0.5 percent in annual average returns. In fact, Vanguard’s research showed similar overall stock exposure between men and women: 74 percent and 73 percent, respectively, in 2014.

Which leads to the most important question regarding this issue: What should any given woman’s risk allocation be as she plans for retirement, given her assets, goals and longevity? There are a few other factors at play, and planners need to understand them to best serve their female clients.

The age difference

Are women more really more risk-averse than men? “It depends on how old the woman is,” says Brad Bernstein, UBS Wealth Management senior vice president. “On the whole, men tend to be more aggressive retirement investors than women, but that falls apart when looking at their ages.”

According to a UBS Investor Insights survey, younger women are actually riskier than men of the same age. Twenty-seven percent of the 25-to-49 female cohort describe themselves as aggressive, compared with 19 percent of all men. Women also tend to be more interested in outperforming the market and less so in earning smaller returns to avoid losses.

Around age 60, however, things change – in a big way.

“As we get older, we start becoming more and more concerned because we realize we’re going to outlive our spouses and might have to play catch-up,” says Mischelle Copeland, Wells Fargo Advisors first vice president of Investments. UBS data also show that 51 percent of women older than 60 describe themselves as conservative, compared with 38 percent of men. Not only that, but they’re significantly more concerned with longevity risks: the future of Social Security, the future affordability of healthcare and outliving their assets.

Life events

The switch may not be due to age alone. More specifically, a few of life’s turning points seem to significantly impact women’s risk preferences – often to a greater degree than for men who experience the same.

Chief among these events is marriage.

“Single women are bigger risk takers than married women, [the latter of which] have a tendency of leaning on their spouses,” says Copeland. In fact, single women earned the highest returns in Wells Fargo’s study, and they traded stocks more frequently than married women. On the other hand, a 2013 Fidelity study found that only 4 percent of married women were willing to invest substantially for higher returns at the risk of losing principal, compared with 15 percent of married men.

Whether due to death or divorce, losing a spouse can also cause fear and uncertainty, particularly for those women whose husbands had handled the finances.

“[These women’s] focus isn’t needing more income – it’s losing principal because they may not be able to go back and earn it,” says Bernstein. “If you’re alone, you’re going to be much more fearful and risk-averse.”

Finally, becoming a caregiver – a frequent occurrence for today’s “sandwich generation” of retirees – clarifies the potential costs of long-term care. “As caregivers, women get a firsthand look at how difficult is to care for someone, and they worry what it might cost them 10 to 20 years from now,” says Karen Robbins, senior vice president of UBS Wealth Management.

The upside?

“I think that when there’s a major event, such as a death in the family or becoming a caretaker, female clients tend to reach out more to the advisor for advice, and they seek to become more educated,” says Copeland.

The need for risk

A desire for education is great news because for most women, the late 50s and early 60s are not the time to eschew risk – at least not altogether. “The irony is women on average live five years longer than men, and if there was a group that would need to maintain the correct allocation, it would be women,” says Bernstein. “You actually add risk when you don’t have enough risk, and the whole reason you put stocks in a portfolio is to create growth and offset inflation.”

Given longer lifespans and growing healthcare costs, staying ahead of inflation is indeed a must. According to a TIAA study on the gender retirement gap, in order for a male and female college graduate to retire at the same age with the same savings, the man would have to put away 10 percent; the woman, 18 percent. Proportionally speaking, women do tend to allocate more to their retirement accounts than men, but with fewer working years and salary increases, they actually need more risk to make up the difference.

Fortunately, longer lifespans mean give market-based assets more time to rise, fall and recover; most pre-retirees and early retirees can afford the risk.

“All things being equal, if you have longer to live and a longer timespan to stay invested, the probability of success will go up,” says Robbins.

Separate buckets

Still, selling during a downturn can be disastrous for a portfolio, and while they may need more risk, women should be wary of systematic withdrawal strategies.

“The worst thing to happen is to have to sell for cash flow during a down market,” Robbins says. “Pre-planning is critical to make sure the equity allocation at retirement and moving forward is reflective of the client’s true capacity for loss of capital.” In short, can the client stay invested during a three- to five-year downturn?

To make sure they can – and to build confidence and allay fears – bucketing is key.

“The idea is to live off dividends and the cash flow from fixed income sources as much as possible, so the portfolio fluctuates over time but grows,” says Bernstein. Separating risk into different accounts not only helps clients avoid untimely drawdowns; it makes it clear that she’ll have the funds she needs when she needs them and that temporary market fluctuations won’t impact her lifestyle.

Building confidence through education

Taking on – or even maintaining – risk in a retirement portfolio can seem like a precarious exercise, particularly in light of the 2008 crisis. So how can you help your clients make the right decisions for the long term while easing their fears in the here and now?

“I think advisors need to go slow and educate their clients,” says Robbins. “Show them past returns, how the investments have done historically and how down markets tend to recover.”

Bernstein agrees: “My favorite slide I use to teach everyone from all walks of life shows the stock market from 1920 to 2016. There’s a 5 to 10 percent pullback every year, and even in the best years, there may be a 10 to 20 percent pullback. It recovers 100 percent of the time.”

Facts and figures aside, it always pays to learn the client’s situation, background and fears moving forward. What are her goals for retirement – and how do her investments relate to those goals?


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