Why women might choose to save and invest differently from men

Money matters among men and women

There are innumerable differences between women and men, including when it comes to money matters. That’s both in terms of how we think about money, and how we manage it.

Though the economic makeup of today’s population has evolved over recent generations, there remain important and relevant distinctions. As well, historical rules of thumb and so-called common wisdom may no longer apply in today’s economy, especially if they were premised or skewed toward male characteristics.

For women, this necessitates taking a principled approach to financial matters generally – and investing in particular – reflecting our current society and their own individual characteristics.

Ability to earn, capacity to save

On average, women face greater challenges in being able to save effectively toward their later years. According to Statistics Canada, women as a group earn about 87 cents for every dollar earned by men. While the reasons are complex and the situation has improved over recent decades, this is a systemic hurdle to be aware of, though it may apply to a greater or lesser extent for a given individual.

Being part of a couple may relieve this concern to some extent. Two can usually live cheaper than one, and therefore save more, both in working and retirement years. However, if there is a breakdown, women tend to fare worse economically post-relationship. That’s in addition to any depletion of mutual savings if the parting is contentious.

Women may leave the workforce to raise children, reducing their income during the time they are away, and possibly affecting their career prospects. Again, statistics show that women spend more time than men in child-rearing, even when both continue to work. As well, women tend more often to be family caregivers to older generations, requiring periodic time away from work, and possibly indeterminate leave in some cases.

Whether these commitments are by choice, due to social pressures or driven by a particular family’s economic demands, they affect both current income and the ability to build savings.

Saving for a longer life expectancy

Typically, women live almost five years longer than men. While it is a positive to be able to share extended time with family and friends, it comes with financial baggage. The prospect of a longer life has the built-in need to fund a longer retirement. And it’s not only the length of time that must be considered, but also how that time is spent.

Take the traditional male-female relationship. A married woman will generally live through the waning health and end-of-life care of her husband. On top of the financial, physical and emotional demands, on average she then has another half decade ahead of her. It could even be longer if, as was perhaps more common in past generations, she married someone older than her. Of course, a new relationship may blossom, but she has to be prepared for the likelihood of eventually being entirely on her own.

Thus, her financial planning must anticipate being part of two end-of-life processes, with all their related costs. Even with the benefit of a helpful adult child or other family member when she is in decline, it is likely that she will require more assisted living services and professional support (and accordingly more associated cost) than was required in the care of her husband when she herself may have carried much of the load on a daily basis.

In a same-sex relationship, you have two women each with longer life expectancy than men. While it may be a guess which partner may be the survivor, there will be more expected years of declining health to fund, possibly both happening at the same time. That is in addition to the income and savings challenges that now both sides of the couple may have experienced in their working years, as mentioned above.

What’s a woman to do?

Be intimately informed

As a woman, you must be informed about financial matters from the very beginning, as you are more likely to face the brunt of it at the very end. This is self-evidently true for singles, and more likely than not in either type of couple relationship as outlined above.

Start saving early, for flexibility later

Individual earning capabilities and family circumstances will vary, but having savings both in-hand and in-mind from the earliest point provides the best grounding to respond to circumstances as life unfolds.

Invest with balanced intention

Those savings have to be invested while delicately balancing two competing priorities: you need to participate in market advances to build savings in your accumulating years, and protect against market retreats in your decumulating years so funds are there when you need them.

Be emotionally aware to be financially prepared

There is an old myth that men invest logically and women invest emotionally. While that stark distinction has been debunked, it is true that both logic and emotion influence money matters for all of us. Accept and listen to the emotions that can affect your behaviour, so that you can make informed decisions that best serve your lifelong needs.

Speak to a financial advisor about how these points about women generally may apply to you specifically. Together, you can then review your savings routine and investment portfolio to ensure that they align with your long-term personal and financial goals.

Magic Number – What are some advisor assumptions on how much to save?

How much do I need to save for retirement? It’s the most common question asked of financial planners.

Of course, the response depends on how much you’ve already set aside, how much you need to live on now, and how much you want to (or must) spend in those later years. That’s the core of financial planning, and there’s a lot of information to be gathered, decisions and assumptions to be made, and calculations to be applied to come up with viable options and sound recommendations — and even then, there is still some degree of uncertainty.

This doesn’t mean that you don’t go to the effort, particularly if you are the financial planner tasked to make those recommendations. The critical step of any plan though, is putting it in motion.

Heuristics – The appeal of simplicity

In the face of what may feel like a laborious and elusive task, people often prefer to use a heuristic, for example “save 10 per cent of your income.” This is also known as the 10 per cent rule. Because it is so simple, it may very well get things moving, which in fairness, is a victory in itself.

Once good saving habits are established and experience gained, adjustments can be made that cater to changing circumstances.

Even so, 10 per cent is just a nice, round, but otherwise arbitrary figure. The aura that surrounds it should not be confused with the principled due diligence that informs good financial planning.

Do you apply it before or after…?

If we’re not careful, the apparent simplicity can be misleading. How you apply it is equally and arguably more important than the rate you choose in the first place. Too little and there’s not enough when you need it. Too much and the budget stress could be overwhelming, perhaps leading you to abandon the initiative you have taken. Consider these key tax issues:

Is the 10 per cent set before or after income tax?

In other words, are you applying it to gross income or net income? As a rough example (which varies by province), the average tax rate at $100,000 is about 25 per cent.

So, do you target $10,000 based on the gross, or about $7,500 based on the net? That could hinge on the mechanics of how you save.

If you pre-calculated $10,000 then you could pre-authorize a proportionate dollar amount from each paycheque/auto-deposit.

If instead you took 10 per cent off each deposit after it is in your account, it would come out to $7,500.

Are you saving with before-tax or after-tax dollars?

As compared to the first question, which was about the amount to save, this is about deductibility. Put in more familiar terms, you could make a deductible RRSP contribution, or a non-deductible TFSA deposit.

While you can get more into the RRSP to begin, eventually that is taxed on withdrawal before you can spend. TFSAs face no further tax. You’ll need to look at tax rates now (known) and in retirement (assumed) to properly compare. If you’re doing some of each, the arithmetic is more challenging.

Pre- or post-payroll?

If you contribute to a workplace group RRSP, your employer will generally reduce its withholding tax, as it knows of this deduction. When you contribute to your own RRSP, the annual withholding will likely exceed your actual tax due, resulting in you receiving a tax refund. While you don’t have to, reinvesting the refund effectively boosts your savings rate.

Canada Pension Plan?

The CPP is a savings program, with a base premium of 4.95 per cent. It is withheld by your employer, so most people wouldn’t notice or think of it as saving, per se. But depending on your response on the preceding questions, it could be quietly baked into your savings rate. And with premiums increasing to 5.95 per cent over the next few years, and an additional four per cent premium on higher income levels after that, it warrants a closer look to make sure it dovetails with your intentions.

Housing and mortgage?

What does housing have to do with it? Well, equity in a house is a type of saving, usually by first saving a down payment then servicing a mortgage. As an owner, you defray some of your future shelter costs, whereas otherwise you would need more savings to pay future rent. Whether this is before, after, or part of your 10 per cent depends on your circumstances, which is why a holistic financial plan should underlie your efforts.

Rudiments of retirement readiness

The route from present-you to future-you

In our early years, retirement isn’t much more than a concept somewhere beyond the curve of a distant horizon. Often it’s portrayed as a time to pursue adventure and realize dreams.

Then as we move forward in our lives, that horizon takes shape. We survey the landscape, chart a direction and take stock of the resources and tools we need for a successful journey. Without completely abandoning the romanticism, we must turn to the practical, and in today’s world that means money.

So while retirement is about more than money alone, it remains at the centre of determining when it’s possible to retire, and what’s possible when you get there.

What does today’s retirement look like?

Individually and as a society we are living longer. Medical advances have reduced infant mortality, eliminated many life-threatening diseases and conditions, and extended lives through better health care. Today, we’re less concerned about surviving to retirement, and focused more on thriving through it.

We will have more years in our retirement, and healthier bodies to enjoy that time. We’re no longer just parking ourselves in rocking chairs and on park benches, so we need to think consciously about how we’ll spend our time, and how we’ll pay for it.

And while health has improved, eventual decline is inevitable. That too will extend out for a longer time, and generally more decisions and adjustments will be required along the way. It’s vitally important to be aware and prepared on many levels: socially, emotionally and financially.

Consider as well that there are more multi-generation families living at the same time now than ever before. Whether you’re an elder, a youngster, or one of the sandwich generations in-between – that interconnectedness will have an impact on everyone.

How do you save within your means?

Let’s consider present you and retired you, and the financial trade-offs between. To take adequate care of both of you, there are three principles that you can use as a guide: Live within your means now, save to fund your future self, and live within your means when you get there.

That may seem patently obvious, but it can be difficult to put into action without a clear picture of your current financial state. That’s where budgeting comes in, but it need not be an overwhelming undertaking. To get started, you need an overall view of major income sources and spending, and then you can get more granular and strategic with your budgeting as you become more comfortable with it.

Most often your principal income source is your own earning capacity. Live healthy to protect this greatest asset, and also consider disability and life insurance for contingences you can’t control.

Do you understand your tax position?

Tax can be a complicated topic. While you don’t need to become an expert, you do need to understand it sufficiently so you can make educated decisions.

For starters, you earn your employment and business income in pre-tax dollars and make your personal purchases in after-tax dollars. As well, your income – and therefore your tax bracket – will usually go from low level in your early working years, up through peak career, and back down in retirement. Knowing this, you can be more realistic and targeted in your saving and spending choices.

This also gives you context for public pension and private savings programs, in terms of what’s available to you, their proportionate value, and the tactics you can use to get the most out of them.

What can you expect from public pensions?

There are two main public pension programs: Canada Pension Plan (CPP) and Old Age Security (OAS).

CPP is a publicly-run insurance plan for workers. You pay premiums out of wages during your working years, for which you are entitled to a retirement pension. The maximum annual pension beginning at age 65 in 2017 is $13,370. You can begin as early as age 60 but if you do that the amount is reduced by about a third, or if you delay to age 70 you can get about 40% more. Presently, the average actual pension is $7,727.

A person is entitled to a full OAS pension after 40 years of Canadian residency after age 18. The full annual pension at age 65 is just over $7,000 (it’s indexed quarterly), though you can get almost a third more if you delay to age 70.

These programs provide a firm foundation for retirement, but most people will want and need to supplement this with private savings.

How do you build your private savings?

Under a registered pension plan, an employer is responsible for making payments to retired employees. The value of the pension is negotiated between employer and employees, and can be quite complex. The employee has no tax liability while working, and simply pays tax on the pension when it is received in retirement.

You may also make tax-deductible contributions to a registered retirement savings plan (RRSP). It is based on your earned income, the maximum contribution room being $26,010 in 2017. Investment growth is tax-sheltered. Withdrawals are taxable, usually taken by moving the RRSP to a registered retirement income fund (RRIF).

If you are a Canadian resident over 18, you may contribute $5,500 annually (current in 2017) to a tax-free savings account (TFSA). Contributions to a TFSA are not tax-deductible, but growth and withdrawals are tax-free.

Where does your home fit in?

Whether you rent or own, housing is usually your largest expense in any given year and over a lifetime. Renting is a pay-as-you-go proposition, exposed to year-to-year market movements. By owning, you can defray a large portion of your future shelter costs by allocating some of your savings into home capital. As a bonus, capital gains on your principal residence are tax-free when you sell, though in the meanwhile that home capital can’t be spent.

Deciding whether, when and how to sell a home can be an emotional prospect, on top of financial concerns.

And as large as that is, there are many smaller decisions that in sum can be equally challenging to contemplate. Armed with a deeper understanding of the retirement rudiments outlined here, you can be better prepared to meet those challenges and more confident in the decisions you make as you head toward and live in your retirement.